More Than Accounting

The Mortgage Meltdown: How we borrowed the American dream

Posted by Rhonda Spaulding on October 3, 2007

It’s a hot topic in the news – the “credit crunch”, “mortgage meltdown”. There are many names but really there is one problem, lenders are faced with high volumes of loan defaults and bankruptcies due to the real estate slow down and interest rate increases. Who is to blame for this mess? As with most problems, there is plenty of blame to spread around. The first target is the companies who handed out these loans to anyone with a dream and a signature. There are many reasons to blame the government, whether it is for allowing these loose lending practices to continue, the Federal Reserve Chairman encouraging people to take out higher risk adjustable rate mortgages, or do we blame the consumers for buying homes they really could not afford? Perhaps it is some of each but now where do we go from here?

How do we re-educate a generation that has grown up thinking that we “deserve” a nice car, big house, great healthcare plans? We live in a society that encourages 100% financing and calls it “American Dream” housing. I find it hard to believe that the American dream is to owe so much on your home and other debts that we can’t sleep at night worrying about the creditors calling. As I write this, know that I am not completely innocent of this mentality. I watch HGTV and find myself thinking that I need granite counter tops and life will not be the same without them. It is a struggle to find contentment in a society where we focus so much on our material possessions.

I have seen different estimates, but approximately 15% of all mortgages are adjustable rate mortgages or interest only mortgages. These have become really popular in the last several years while rates were so favorable. These loan interest rates are now adjusting and the payments are going up as well. The house won’t sell for the amount owed and many are forced into default on these risky loans leaving someone to clean up the mess.

It is obvious that the government will take action to help some of these people who are about to lose their homes. However, I do question who holds the majority of these loans. Is it really the low income families who didn’t qualify for a traditional or FHA mortgage or more likely real estate investors who were trying to “flip” houses and get rich quick? There are some proposals floating through Congress and President Bush has proposed to back some of these loans that adjust in 2008 with federally backed FHA loans. While there are some good limits in place on converting these loans to FHA loans, what happens when these borrowers decide to default because we have only temporarily fixed the problem? You and I – the American taxpayers-will be called on to bail out the borrowers and the companies who loaned them the money in the first place.

The Federal Reserve also lowered interest rates which “will hopefully make it easier for people to borrow money” according to a recent article in the Queens New York Gazette. Is that the prize we seek? Obviously borrowing more money has not worked to this point but some think that should help solve all of our problems. We tend to look at the government for the solution, but it looks like once again the government is going to put a band-aid on a generation that really just needs a good dose of common sense and self-discipline.

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