Subprime Mortgage Crisis Is Going To Cost Us Money

I saw an article this week on CNN Money with the headline 70% of subprime borrowers aren’t getting help.  I do not get this.  The whole situation is ridiculous to me.  Why should people that took out subprime mortgages expect help?  They took out a loan that they can’t afford and the obvious result is now occurring.  Apparently, the number of delinquent subprime loans is growing so fast that the mortgage companies can’t even keep up with it.  According to the article, about 25% of all subprime loans are in delinquency.  What kills me is that everyone seems surprised by this!

Why be concerned about the subprime mortgage situation?

Okay, so I don’t have a subprime mortgage and neither do you, so why should we care about this impending "crisis"?  Well, in another article from CNN Money, we find that Congress is getting ready to spend our tax dollars to bail people out of their impending foreclosures.  Of course, in their usual style, the politicians may be spending our money on a hopeless cause.  They are proposing legislation to federally guarantee the refinancing of a lot of these loans that are in default.  I can’t believe this!  The subprime borrowers made bad decisions that ruined their credit to the point that they couldn’t get a regular mortgage and then they made another stupendously bright financial move in taking out a subprime loan and now we, the taxpayers, are going to guarantee they’ll pay in the future.  Does something seem wrong with this picture to you?

Why are so many subprime borrowers delinquent?

The terms of most subprime mortgages are crazy!  They generally have an adjustable-rate which means that after a short introductory period of 2 to 3 years, the rate gets adjusted upward every 6 to 12 months.  Some of these loans even give the borrower the "opportunity" to make interest-only payments during the introductory period.  After that, the balance of the loan is recalculated at a new higher interest rate.  Once the adjustment occurs, the payments usually go up substantially often by as much as 50%.  This is where subprime borrowers get in trouble.

What kills me is that the borrower was a poor candidate for a mortgage in the first place because they couldn’t qualify for a traditional mortgage.  Then the bank hooks them up with one of these really nice adjustable rate mortgages.  Let’s face it, these people already had a poor track record for managing their money and now the bank thinks that they are going to plan, prepare, and be ready when their mortgage adjusts after a couple of years!  I have no sympathy for the borrower or the lender in these circumstances.  It seems just plain stupid to me.

But wait, there’s more.  As if the adjustable-rate mortgage (ARM) wasn’t enough, subprime lenders came up with another jewel that is killing them now.  They set some of these loans up with a balloon payment at the end of the introductory period.  This makes the entire balance of the loan due in one lump sum at the end of the first two or three years!  Of course, the idea is that the loan would be refinanced, but again subprime borrowers are not good money managers so, this often doesn’t work out. 

Should we bail out subprime borrowers and lenders?

I’m really trying to get this straight in my head.  What were these people thinking?!?  It is often said that it takes two to tango.  Well, to me, this is the case with this so-called subprime mortgage crisis.  The borrowers and the lenders were stupid.  They both knew the situation was risky going in.  How is it that neither side saw the writing on the wall?  I guess the borrower was blinded by their desire to own their dream home and the lender was blinded by the potential profits.

Of course, there is another side to this argument.  If we don’t bailout these knuckleheads, then it is likely that the price of homes will continue to fall.  Our homes will depreciate because the market will be saturated with thousands of homes at bargain prices.  In addition, all of the foreclosures could cause some lenders to collapse.  These things will create all kinds of ripples through the economy.  So, the problem is complicated.  The damage is done.  Either way it is likely going to cost us some money.

Still, I am against the idea of using my tax money to bailout people that made stupid choices.  I believe in personal accountability.  I think that both the subprime borrowers and lenders should have to bear the burden for their mistakes.  I am prepared to ride out the results.  I do not want Congress to throw billions of dollars of my hard earned money toward fixing something that should have been avoided in the first place.  Hopefully, this will teach both sides of this debacle to make wise choices with their finances in the future.  I urge you to contact your elected officials and discourage them from pursuing this bailout.  Make your voice heard!

What can we do to avoid the pinch of the mortgage crisis?

Of course, whether Congress moves forward with their plan or not, this is probably going to cost us all some money.  So, what can we do?  We can use some of the same techniques to ride out this storm as what we might use to prepare for any financial downturn.  We should:

1. Lower spending and increase savings.  (live below your means)
2. Payoff debt
3. Save 3 to 6 months of living expenses in an emergency fund.
4. Plan to hold onto your present real estate until the prices rebound.

If you are doing the right things financially, then this will only be a mild speed bump in your financial future.  However, for those caught up in the crisis, it could be quite a nightmare.

What are your thoughts on the subprime lending crisis?  Leave me a comment and let me know.

Photos by joelogon and Storm Crypt