Blonde moment

And the silver spoon.

Saturday, March 15, 2008

A few things about the mortgage “crisis”…

An article in today’s Star Tribune talks about how foreclosures in a poor area of Minneapolis are not necessarily due to interest rates going up as part of an ARM . However, a law professor from the U of M, Prentiss Cox, says, “The lenders really invented and aggressively sold all these things. Are individuals responsible for their choices? Yes. But so far individuals in their houses and their communities are the only ones who have paid the price.”

I can’t speak for “all” foreclosure situations, but I can speak a little on the foreclosure we just bought. The county we purchased in has free and easily available property information on-line. So, we know the purchase price the last owner paid. Assuming the previous owner resisted temptation and did not take out a home equity loan, the bank is either going to take a loss for our property OR they are going to break even. Let me explain…

When the house went out on the market, it was listed at roughly 25% higher then the price Josh and I are paying for it. Plus, the bank is paying our realtor’s commission, the closing costs, the VA loan origination fee, utilities until we close, property taxes until we close, and a couple of minor repairs. When one subtracts all the other fees the bank is paying, they are just a few thousand above the previous purchase price. Now, this is not counting things like property taxes from the time the previous owners vacated, the costs of eviction, and stuff like that. So, is the bank profiting? I’d say probably not.

And who, may I ask, are “the lenders?” Sure, we have a loan officer who works for a mortgage company. But, where does this money come from? Remember the bank run scene in “It’s a Wonderful Life?” Jimmy Stewart had to tell his savings and loan customers, “I can’t give you all your money, it’s in his house and his business.” Now, Josh and I have a savings account. This money is not sitting in a vault in our bank. No, we put our money in the bank in hopes of getting some little bit of interest (we have some money in savings because we want it easily turned into cash, there are better ways of making your money work for you). But, where is our money, if not in a vault in the bank? It is in someone’s college education, in someone’s small business loan, in someone’s HOUSE.

Then, why isn’t your savings account rate higher? For a variety of reasons. First, we pay loan officers to find worthy people to lend money to, we pay for their office, their staff, and their office supplies; we also pay for tellers to give us money when we want it, we pay for ATMs, we pay for bank locations, and stuff like that. Second, we sacrifice higher interest in favor of being liquid. Third, interest rates are low as it is. Forth, our bank is publicly traded, so we have shareholders to contend with. So, what’s the big deal if someone defaults on their loan? Our money is FDIC insured. The big deal is Josh and I may get our principle back, but if there is less profit to share, our savings account rates suffer; as do the rates of other “safe” vehicles of investment. The big deal is, we’re not talking about a soulless entity; we are talking about hard working people who put their money in a bank. And so, if interest rates fall to a certain rate, people may begin putting their money in their mattress instead of banks. Or they’ll seek higher interest vehicles. Or money to invest in students, businesses, and HOMES becomes harder to obtain.

And what of these shareholders? Well, do you participate in a defined contribution retirement account through work (like a 401(k))? Do you have an IRA? Josh and I do. And we own mutual funds that invest in our bank.

Are ARMs and other loans bad for people to take out? Josh and I have a fixed rate loan. But… most sub-prime, high risk loans are not in default. I’d say there are people who are benefiting from more relaxed lending standards. We can’t judge the entire population of these loans based on the relatively few who default. I’m sure there are first time home buyers who are making these things work. And we shouldn’t take the American dream from them.


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