Our government has set a precedent this year that will do irreparable damage to both our economy and society for many generations to come. The five year freeze on interest rates and the U.S. Senate bill to lower standards for FHA loans will both serve to bailout irresponsible homeowners and lenders.
I once earned a living as a loan officer for a major mortgage banker in San Diego. We originated FHA, VA and Conventional loans. Although, I only did this for five years beginning in 1978, the knowledge that I gained in personal finance has stayed with me ever since. Those were the days when people were expected to make sufficient money to make payments on a house and make a sizable down payment before loan documents could ever be drawn up. We had two ratios for conventional loans that were required: 1) ratio of monthly Payment (principal, interest, taxes, and fire insurance) to monthly gross income 2) ratio of payment plus bills to monthly gross income. The first ratio could go no higher than 29% and the second ratio could go no higher than 34%. Some lenders were even more conservative than this. Qualifications for FHA and VA loans were different, but in many ways were similar, with the exception that VA loans required no down payment. We tried to do the best job possible in prequalifying borrowers, because nothing is worse for all parties involved in the sale of a home then when a loan is denied by an underwriter after being in escrow for eight or nine weeks. However, with careful pre-qualifications, this rarely ever happened.
What has helped me in my own personal finance and enabled me to retire early on a modest income is that I learned first hand that monthly debt service was the most frequent cause of a single person or married couple's inability to qualify for a loan. Usually, this took the form of one or two car payments. From practical experience, being in the mortgage business taught me not to abuse credit and to avoid high monthly bills, especially on new cars.
It saddens me to see what has happened to society in recent times. There is not longer a sense of personal responsibility for one's actions and decisions. As armor99 so eloquently stated, home ownership is indeed not a right but is rather a privilege. This kind of reminds me of what my high school driver's education teacher would say about our driver's license, "Remember it's a privilege, not a right. You have to earn it and follow the rules of the road in order to keep it." In the same way, many of these subprime borrowers in recent times did not hear, or choose to hear someone tell them that homeownership is a privilege and not a right. To start with, many did not even have to put down money on their house. Many did not even have to pay closing costs. Many did not even have to have good credit. Many did not even have to prove that they even had a job. When the escrow officer explained terms of the loan and what the index was tied to and what was the most they could expect their payment to go up to, many chose not to hear this. But, they liked the idea of moving their family into a big McMansion with little or no down payment and a small starting monthly payment, perhaps even close to what they were paying for rent.
My, how society has changed since I was a loan officer in the late 70's and early 80's and I don't mean for the better. It seems that many do not want to accept responsibility for their poor decisions and now we have a government that reinforces their lack of good judgement. Many want to blame someone else. We've been so generous with our "privileges" that we have even granted driver's licenses and home ownership to many who live illegally in our great nation.
Unfortunately, we're all going to pay for this big time, because society and our economy will suffer for generations to come because of it. I think we've had it far too easy in recent years. Things have been just going too good for us. What happened to the days when we were expected to put 20% down on a house. If you had golden credit, you might be able to get by with 10% or even 5%, if you showed you had a good job history. Was money just so plentiful the past couple of years that banks found it necessary to just give it away?