Thursday, August 16, 2007

Sub Prime Mortgage: Who's to Blame?

There has been an awful lot of talk lately about the sub-prime mortgage "crisis" that is going on in America. People across the country are defaulting left and right because they can't pay off their mortgage! This is bad. But I am a bit confused about the whole thing, because I can't figure out who is to blame...but I have my suspicions.

First, lets define the term. From Wikipedia:

Sub prime lending, also called B-Paper, near-prime, or second chance lending, is a general term that refers to the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. {generally a credit score < 650}

This is inherently not a bad thing. It extends credit to people who couldn't normally get credit. It becomes a bad thing when people don't pay their loans. It's not that difficult.

So the other day I read this news story. It talks about how Democrats are taking on the mortgage problem, and offering ways to fix it. This is a good thing. Ideas are good. Unless they are bad ideas. Then they are bad. Now, before I continue, you should know that I don't like politicians. Almost all of them. I think they are greasy liars who are only looking out for themselves to keep their jobs (probably like most people...but I try not to be that cynical). These particular politicians have put the entire weight of blame on the lenders...100%. The ENTIRE sub prime meltdown is their fault, because they are unscrupulous corporate jerks. I am sure some of the blame should fall on them. There are probably some devious people who run devious lending institutions, trying to get people to default on their loans. Probably not many though.

I would say most of the blame has to ride on the homeowners. And it could all be fixed with a little personal responsibility: DON'T GET A LOAN YOU CAN'T PAY BACK!!!!! That's not so hard. I wish I had a bigger/better house. But I wouldn't be able to pay for it...so I couldn't do it. It doesn't really take smarts really...just common sense. If I don't pay my loans...I will be in a lot of trouble.

Senator Christopher Dodd, the Chairman of the Senate Banking Committee, recently came out with a list of things he wants to see enacted into law:

End prepayment penalties - the fees paid if a borrower chooses to pay off a mortgage early.

Tighten underwriting standards so that borrowers are judged on their ability to repay the loan at fully indexed rates rather than at low teaser rates.

Require lenders to escrow for taxes and insurance and disclose those expenses to borrowers

Cut down loans that require little or no documentation proving a borrowers' assets or income - the so-called "liar loans."

Let's go through those.

1. End prepayment penalties - This would be fine with me. But at the same time...just don't go with a company that has prepaid penalties. There are plenty of options out there. READ THE CONTRACT BEFORE YOU SIGN



2. Underwriting - Again, this wouldn't be a bad thing to happen...but it's not hard to calculate how much you can afford. There are online calculators and the such. Find out what your rate will be. Figure out how much house you can afford. Spend less than that. not difficult...but it does require personal responsibility.



3. Escrow - Don't go with a company that doesn't escrow. There are plenty that do. I feel like I am repeating myself.



4. Liar Loans - I am in agreement with this one. This has a strong sense of predatory lending and purposefully taking advantage of someone.

My problem with politician's ideas is that they all require more law and more regulation instead of teaching people to not be idiots.

I wish I ruled the world...everything would be so much better.

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Labels: Banking, Economics, Subprime Lending

Posted by Adam Wilson :: 11:13 PM :: 0 comments

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