November 14, 2008

What I think of the subprime mortgage mess

My husband and I are not in the banking industry, nor do we have a finance background. But we thought about the possibility of a subprime meltdown way before it became all-too-apparent. We don't have precognition. All we had was common sense.

Remember the real estate buying frenzy that began back in 2003? It was all due to those "lovely" adjustable-rate mortgages (ARM). A lot of people were misled into thinking that they can afford homes which they normally couldn't. We knew people who went with ARMs, even if we warned them against it. They told us that they'd sell their homes before the rates went up. Three/five years later, the rates went up. Their homes went unsold. They are saddled with extraordinarily high mortgage payments. And they aren't alone in the boat.

It could've been averted. With all paperwork that gets completed and submitted when applying for a mortgage, you'd think the bank would use a fine-toothed comb to make sure that you'll get the right amount you can comfortably pay off. I remember when we went for preapproval. The banking representative told us that we can easily get preapproved for $550,000. We said no. We also insisted on a lower amount. He didn't like it, but we were dead-set on it. Then he pushed ARMs, which we strongly declined.

Isn't it common sense that this was inevitable? You get enough people who went for ARMs and you end up with enough people who cannot afford to make their mortgage payments in 3/5/7 years. So what happens next? Subprime mortgage mess. Helping people get their dream homes is not a bad thing. What's bad was making people believe that they can afford their dream homes by pushing ARMs on them. The banking industry stirred people's hopes and stoked the desire to make it come true. Unfortunately, when you think about it, if you knew that in 3/5/7 years' time that your rates would go up, then you're not really living "happily-ever-after". Not when you know that you'd be selling your dream home in the future.

People desired the American dream - a big house with white picket fences - but now it turned into the American nightmare.


Jon said...

so true cez, the ARM really messed up a lot of people. but i think there is more to that than just the higher mortgage. a lot of people in this country rely so much on credit. this gives them a mentality that they can afford something as long as they put it in credit. but the bottom line, they can not. and these people who got in trouble with the ARM mortgage are people who are so bad in managing their finances to begin with. the ARM is just the icing to the cake.

Cez said...

Hey, that was supposed to be my upcoming post, the one about credit! I wrote a draft of it, but haven't finished it yet. You'll see it up one of these days...

Jon said...

looking forward to read it.