Fatherly Advice for Mortgage Shoppers

If you can remember a time before the internet, a time before pocket cell phones, and a time when interest rates were double digit, then this post will make all the sense in the world.  

Dear old dad used to say, œIf it™s too good to be true, then it is.  

The headlines name the economy as the number one concern of most voters this election year.   Everybody is feeling the cold from stagnant home sales and tightening guidelines from the mortgage industry stressed by the subprime lending meltdown.   What the headlines neglect are the number of foreclosures by average borrowers who took the chance and played the housing lottery, and lost.   Subprime borrowers, typically characterized by low-end credit scores, are the tip of the proverbial iceberg.   The majority of homebuyers that purchased homes with little or no equity interest feel they have nothing to lose by forgoing mortgage payments.   They favor a short sale or foreclosure as the only alternatives.  

How does fatherly advice factor into all of this?   The masses went looking for the pot of gold at the end of the housing rainbow.   Like sheep following a mindless leader, millions bought into the scam of rampant consumerism (remember the Presidential decree in September 2001) and an endless spike in housing prices.   The entire financial industry became a veritable Wild West show of exotic loan products for anyone alive.   Good judgment fell by the wayside as borrowers flocked to down payments below 20% (Dad plunked down 20 to 25%).   Hair salons were filled with discussions of making fast money in real estate without regard for experience, rising property taxes, and flattening incomes.   The hoi polloi succumbed to a general lack of reason and sensibilities.  They played the housing market like stock market day traders from a decade ago.  

Psychology is important here.   Many borrowers got into trouble because they wanted to believe what their lenders told them.   Remember how option ARMs and teaser start rates were once touted as easy to qualify?   Other borrowers and their lenders manipulated, misrepresented, or lied about their eligibility without reading the terms of the note or considering the consequences of their actions.   It™s all about choices.   Just like a polished politician, some people tell you what you want to hear.   You are attracted by the initial rate and terms, get switched in the process, you buy the lie, and realize the truth when it hurts you later.  

In a cynical world, integrity is passed off as a weakness.   The free market allowed for this mess to happen and only the free market can work (yes, work) us out of this situation.   Your father probably would be unsympathetic for the gluttons who risk losing or have lost their homes.   These risk takers should have bought only what they can comfortably afford, have done so with a down payment, and paid close attention to the terms of their mortgages.   This is the golden opportunity qualified buyers have been waiting to happen: Reasonable rates, lower home prices, plenty of inventory, and fewer competitors chasing the same dream.  

People should hear what they need to hear to make careful decisions, not what they want to hear.   Would you choose a doctor who prescribes you the wrong medication because of slick advertising?   It is human nature to believe, but the market has shown what can happen when you free up too much money for the asking.   Seek out the assistance of a straight talker and forget the hype.   Get advice peppered with a good dose of reality: Buy what you can afford; have an equity interest in the property; protect your investment.   Your father would appreciate that.  

© 2008 Michael S. Amers

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