Minor Thoughts from me to you

The New York Times published a long story last week on the sub-prime mortgage "crisis". Can the Mortgage Crisis Swallow a Town? - New York Times. As I read through it, there were a few points that jumped out at me.

One of those loans belonged to Audrey Sweet, a Maple Heights resident and a first-time home buyer who borrowed $118,000 from Countrywide in late 2004 without putting any money down. Because of Mrs. Sweet's poor credit history and lack of assets, the adjustable loan's rate was 10.25 percent, but she says she was told that if the couple "just proved themselves," they could quickly refinance at a lower rate.

Mrs. Sweet says Countrywide advised her that the monthly property tax bill would be $100, but it turned out to be $230 and the Sweets quickly fell behind. Countrywide stepped in and paid $3,493 in back taxes in March 2007, and the next month raised the Sweets' monthly mortgage bill to $1,713 from $1,055.

That was far beyond the budget of the couple, so ... working with a local lender, Third Federal Savings and Loan, the Sweets managed to refinance the loan at a fixed rate of 7.2 percent, and the original $1,055 monthly payment now covers the property taxes the Sweets couldn't afford before.

Notice the main points of this little sob story. The Sweets did not put any money down on their house. In effect, they were on a rent-to-own plan with their house. Even if they had defaulted on the mortgage, they would not have lost any money -- they never put any down in the first place. They were only making monthly payments, no different from paying monthly rent.

Note also that the couple had a poor credit history and no assets. Countrywide took a big risk in loaning money to them. For this, Countrywide is demonized throughout the article. (What a great way to encourage companies to take risks!)

It is also clear that the Sweets bear some responsibility for their predicament. "I do blame myself a little bit," Mrs. Sweet acknowledges. "I feel dumb." She explains that she was focused on the monthly payment when she borrowed from Countrywide, not the interest rate or taxes due. "Once we got the loan documents at the closing, I just came home and stuck them in a drawer."

Wow. Just ... wow. I just took out a mortgage recently. I know for a fact that you have to sign a stack of documents that state in very plain language exactly what your monthly payment covers and exactly what the terms of the loan are. The Sweets don't just bear "some responsibility" for their predicament. They bear all of it. They signed the paperwork, the saw the terms, they chose to ignore the terms. End of story.

They had a lender give them a chance, even though previous evidence (and this story!) shows that Countrywide was taking a huge risk. They very nearly threw that chance away.

[Mr. Stefanski, CEO of Third Federal Savings and Loan] never offered no-money-down loans, piggyback mortgages, exploding adjustable-rate mortgages or the other financial exotica that ultimately tripped up the Sweets and millions like them.

[Mr. Stefanski] does not hide his feelings about just what went wrong in places like Maple Heights. "The whole system was based on raping the public," he says, matter-of-factly. "Not everyone should own a home -- just those who can afford it."

Mr. Stefanski is just dead wrong. The system was not out to "rape the public". Indeed, I find it hard to see how someone can "rape" another person by giving them free money and risking not getting any of it back. How, exactly, does the lender make out in that situation? If any "raping" is going on, it seems to be that the borrower is raping the lender.

Secondly, Mr. Stefanski's attitude is 100% discriminatory. He only favors giving loans (and taking chances) on borrowers who are supremely well qualified and well-off. In other words, existing middle-class Americans. If everyone had the attitude he did, no one would ever move up from the low-income ranks to the middle-income ranks.

I'm grateful that lenders across the country chose to take risks on low-income, high-risk borrowers. Many people proved unable to handle those loans. Many other people were able to get ahead, thanks to those loans. I'd rather focus on the people that got ahead instead of shutting down lenders because of the people that didn't. Wouldn't you?