Tuesday, December 28, 2010

Great Example of What Caused the Housing Mess

Last night, the Mrs. and I were watching one of those house buying shows on HGTV. The couple that were looking for their first house were in Portland, Oregon. They both worked for the local school system. One was a special needs teacher, and the other worked in administration, but her exact position was never made clear. They were pre-qualified for a $375,000 loan. The male wanted a big house with lots of room, while the female was a bit more practical. Other factors were not told to the audience such as other debt considerations: car loans, personal loans, credit card debt, college loans, and so on. So, lets just review the numbers so far. A young couple, both working in the Portland school system, can qualify for a monthly mortgage of more than $2,100. Sure. And I play a doctor on TV.

The first house they looked at was just north of their $375k loan amount. It was a beautiful house, and the husband was in love with it. While the wife agreed that it was a nice house, she was really unsure of the price, and what they would really be able to afford. She suggested they get a second opinion on the loan amount, just to make sure. The second lender they went to see pre-qualified them at $325,000, $50,000 less than what the first lender would do. While the husband sat their dumbstruck, the wife asked why such a difference. The lender was good enough to explain this, thankfully.

Wow, I got myself into a
mess. All by myself!
The original loan amount did not take into considerations such as interest that would be paid every month and property insurance that would go along with owning a house with a replacement value so high. I imagine the first lender that pre-qualified them only took into consideration the cost of the house, and not other ancillary costs. The funniest, and perhaps saddest, thing about the episode was the husbands attitude towards the original loan amount. He said this, and I quote, "Well honey, I'm sure the lender wouldn't have pre-qualified us if they didn't think we could afford it." And that ladies and germs, is how we got into this mess. The husband is assuming that someone WHOSE JOB IT IS TO SALE LOANS AT THE HIGHEST POSSIBLE AMOUNT IS LOOKING OUT FOR THEIR BUDGET. At least the second lender had the sense enough to include all costs associated with home ownership, even if it meant they had to scale back their wish list.

So, while the left is crying to the heavens about predatory lending practices (and I don't doubt they exist), there aren't enough people crying to the heavens about people getting houses they can't afford. If the wife didn't insist they go get a second opinion, they would be staring at a monthly mortgage they would have no chance at actually affording. And the nation is saved from another foreclosure.

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