One of 21st century America’s favorite pastimes is to find someone, or some organization, to blame for problems its own citizens may have caused themselves. So it is now with subprime mortgages. The SEC filed charges on December 16 against 6 ex-executives of Fannie Mae and Freddie Mac (including their former CEOs). The actual charge is understating the percentage of subprime mortgages both organizations held when the housing bubble of 2006-2008 was about to collapse.
But mark my words … the ever-hungry-for-blood-headlines media, and a collection of smarmy D.C. legislators, will more than likely try to make these former executives symbolic villains who caused the pain that individual subprime mortgage holders feel … pain the mortgage holders themselves caused, by signing the dotted line.
It’s easy and almost therapeutic for us Americans to blame someone else for problems we might have caused ourselves. You got fired from your job for insubordination, gross incompetence or even an ethics misdeed? In today’s America, there is bound to be a support organization or a big-mouth polemic politician who will fix the blame on your former boss, the CEO, or on yet another big-mouth polemic politician. Are your teens grossly overweight, and happened to have been eating at McDonald’s 10 times per week? There are attorneys who specialize holding McDonald’s culpable. Couldn’t take your lead foot off that Toyota Prius accelerator pedal, and found yourself in a car wreck? Politicians and attorneys are more than willing to trash Toyota’s reputation, causing a 40% drop in Toyota’s profit, by publicly accusing it of producing defective vehicles that cause fires and death. Subsequent investigations that exonerate Toyota were not popular enough to make media headlines, because they shift blame where it really belonged – on the driver.
Now, to subprime mortgages. What are they?
They are mortgages engineered for individuals whose credit qualifications would not normally allow them to qualify for the amount of money they want to borrow to purchase a desired piece of property. An individual making $50,000 per year wants to purchase a $750,000 home, and has no money down. Common sense ought to dictate that the potential borrower cannot afford a $750,000 house. But a subprime mortgage could allow this person to make $1,000-per-month payments, for a limited time. The difference between what the mortgage holder paid, and what he SHOULD have paid, gets tacked on to the principal, to be paid later with a “balloon” payment. When interest rates eventually go up, the payment goes up. And if there is a housing crisis, the house can be difficult to sell. So the borrower is stuck with higher interest rates, MUCH higher payments, and a MUCH higher mortgage.
And there you have the current housing crisis, in a nutshell. Borrowers default on these loans, while banks and lending institutions are left with properties worth a fraction of the unsettled loan amounts.
So who are the victims? Are you, if you’re a subprime borrower? Absolutely not. If there is a victim in this subprime debacle, it is most likely the borrower who signed an appropriate mortgage he could afford, and whose house value is now far lower than it was, because of the flood of house foreclosures, many of which are the result of unsettled subprime mortgages.
Perhaps mortgage applicants should be required to take a math course – the type of course that ensures that the borrow knows what happens when he borrows $750,000, at 8% interest over 30 years, and yet pays only $1,000 per month. For the record, the payment should be $6,544.90 per month. This means that $5,544.90 per month would be added to the original loan amount of $750,000. In one year, the $750,000 mortgage is now $816,538.80.
Try the math yourself. Click here for a mortgage calculator.
Imagine how much the mortgage is in 5 years, when a balloon payment is due!
And whose fault is it? The fault of a “predatory lender”? No. It’s the fault of the person who signed the dotted line.
The objective of this column is to make the seemingly complicated economy simple, and educate readers on what the economy changes will cost him or her. Part of that objective is to enable the reader to avoid problems – before he signs the dotted line!