The Subprime Mess

When I signed paperwork for my first mortgage in 1997 I knew exactly what the interest rate was and I still know it today. I bought a 30 year fixed even though the initial interest rates were lower on adjustables. I’ve never refied that mortgage; I’ve never had to because I knew that adjustable rate mortgages were gambling – and I don’t gamble (no lotto, no raffles, no playing stocks, nothing).

The adjustables on the market in 1997 weren’t the infamous 2/28s that fueled the subprime boom in 2005-2006. These were simpler debt instruments where the interest rate was based on the prime rate. If the rate stayed the same, I paid less than if it the prime rate rose.

Sure my house is small. I could have bought a much bigger house using those adjustable rate mortgages, but I knew deep down that I could afford those homes. Why buy a home that I can’t really, truly afford?

So I’m in a small house today, but I have equity and security knowing that I didn’t bite off more than I could chew. While others in similar financial situations bought big McMansions, we have lived quietly in our cozy home trading space for economic security and the peace of mind that comes with it.

Which leads me to this excellent series (article 1, article 2, article 3, article 4, article 5, plus this astute observation by Caroline Baum. ) on the subprime mess at Bloomberg.com. As you may expect from the above, I don’t feel very sorry for those who lived beyond their means and didn’t read the fine print. I don’t buy that fine print cr@p because honestly your gut knows whether you can afford something or not. If you can’t trust your gut, then you’d better break out the magnifying glass and educate yourself in the details found in your mortgage app.

At the same time, I’m not all that supportive of the banking industry. Calls to bail out the subprime borrowers really are nothing but demands to bail out the industry. I see no reason why I, who chose to live in a smaller house even though it would have been nice to have a bigger one, must pay to support gamblers who bet against the market and lost.

Losers at craps don’t get reimbursed by the government, so why should borrowers? The best thing for borrowers to do is move into a smaller home or into an apartment, get back on their feet financially, and stop gambling.

UPDATE: 12/21/2007
Here is an excerpt of my post on Sept. 16, 2005, about a year before the mortgage delinquency rate began to shoot up and the bubble began to burst. I am no genius, nor am I a fortune teller. I am an amateur historian who has lived through several bubbles in my brief time.

It’s September 2005 and the Global Housing Bubble (GHB) continues expanding. However I don’t think you have to be Nostrodamus to predict that sooner or later, this bubble will burst. Then we will look back and say to ourselves “What were we thinking?”

Well, truth be told, we are thinking – but past success means alot more in the present than the future. Currently the future is very dim, and the ability to predict with any certainty makes one tend to not even try. After all, look at the past. We thought housing prices were overvalued when they were half what they are today, didn’t we? And look what happened.

The Past is real and to a great degree concrete. We lived it and know it – well, at least our faulty perception convinces us that we do. The Future, on the other hand, is as ethereal as a cloud.

Plus, we also take comfort in the Herd: “Everyone else is doing it. Can everyone else be similarly deluded?”

Well, yes they can. Buying Global Crossing at $200/share. Selling homes to buy a single Tulip bulb. History is peppered throughout with mass delusion of one type or another.

In addition, there are always Doom Sayers. “The End is Nigh”, “The bubble will collapse”, “Doom, Doom, Doom.” Most of the time these people are wrong and can be safely ignored. However when do you start listening to them?

Perhaps you never should – since broken clocks may be right twice a day but we don’t use them to tell time. More useful are predicators that have been tested by time and have worked in the past. All of these indicators point to a housing bubble – one that exists on a global scale.

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One Comment

  1. mgroves:

    I don’t know if the comparison to gambling is a great one, but I certainly agree with your points: failure/bad planning/bad decisions should not be rewarded. Not the lenders, not the lendees.

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