SubPrime isn’t just what you think
Jon Stewart made a remark a couple nights ago about how silly the subprime mentality is. You take people who can’t pay their bills but want a house. Then, instead of making it easier for them to pay for the house, you actually make it harder.
This makes sense in that the bank is taking a greater risk with these folks so they have to get more profit, hence the higher rates. While I believe that this is the system shooting itself in the foot (as the crash has proven), it does make sense in a controlled setting.
However, Mr. Stewart is leaving something out. There are millions of people out there with good jobs and good income and lousy credit because of stupid mistakes in the part. Like me. We got caught up in the subprime storm as well. Now, many of us got out in time, but many didn’t. And these people got screwed, too, when their rates skyrocketted. Its amazing how close even we are to serious financial troubles.
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2 Responses to “SubPrime isn’t just what you think”
September 5th, 2008 at 8:22 am
People often remark on the apparent backwardness of the credit world (the worse your credit is the more you have to pay to get credit, making it harder to make your payments, vicious cycle ensues, etc.) It seems backwards until you really think it through. Ask : how else could this be done? Charge people with good credit more because thay can afford it? Ridiculous. Make no distinctions amongst borrowers (everyone gets the same terms and rates)? Impossible - what incentive would there be for people to properly manage their credit and finances? Lenders would fold as a result of the inevitable abuses.
The bottom line is : live within your means. If you fail to do so you will eventually be forced to live BELOW your means because you will be paying for past financial sins.
That’s what is happening to people now. A couple who can comfortably afford a $300k house wanted a $500k house because “our friends from college have a house like that, and why shouldn’t we also?”. They end up getting in so much financial trouble that the only way out is to eventually scale way back and live in a $175k townhouse until they dig themselves back out. Marriages fall apart, kids are scarred for life, do drugs or get pregnant, everyone bemoans the decay of family values and thus … they vote for McCain in November because after all, the republicans are the party of conservative family values. Everything is connected!
September 5th, 2008 at 8:31 am
I basically agree. I do think, though, that recovering from past mistakes is made far too difficult.
But, ultimately, repairing your credit can be done with patience and a little self-control.
My real point was that it isn’t just predatory lending causing the problems in the housing crisis. Its banks thinking strictly short term.
Look, if I buy a house with an ARM that I can pay, but three years later, the rate goes up well beyond what I can pay, what does the bank get out of it? They have to foreclose, of course, but it doesn’t seem like that makes good sense profit wise. Why not just increase the rate to a level the owner can still afford?
One might think that there MUST be a good reason for banks to jack rates up so high the person has to lose the house, but given the current crisis, one might realize that isn’t very likely to be the case.
BTW, you are right about everything being connected. Money is one of (if not the) biggest sources of stress in a marriage.
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