Sub Prime Lending = Foreclosure

July 12, 2007

I’m starting to see a lot more articles like this:

More than a quarter million black and Hispanic families are expected to lose their homes in the next few years due toforeclosure. For many, the financial trouble will be traceable to a mortgage they should never have been given. MarketWatch

I talked about people living beyond their means in an earlier post. It seems that this sub prime lending issue is a lot bigger than I thought. To put 250,000 families in perspective, that’s more than the entire population of Raleigh, North Carolina.

Home ownership is a key ingredient to wealth. Buying a home that you can’t afford really throws a kink into achieving said wealth. From what I’ve been reading, a lot of these people have gone through mortgage brokers to get a home loan. Now, I’m not saying that mortgage brokers are shady, but I am saying that they aren’t the only people that offer a mortgage. In my experience, mortgage brokers have higher fees and higher interest rates. They offer the lower rate to bring in the customer and then slap on the fees and fine print that makes the loan a disaster waiting to happen.

People that do not know more than how to spell “mortgage” should not be getting an adjustable rate mortgage. It’s a financial tool that should be used by people with at least basic financial knowledge. When I hear about people that didn’t know that their mortgage could go up 30% in three years, I know that they had absolutely no idea of what they were getting into.

Unfortunately, it seems that these loans were the only way minorities could see themselves achieving homeownership. The sad thing is, if they got just a little education about buying a home and how mortgages worked, they could have saved themselves a lot of heartache. It doesn’t help that minorities are targeted for these “good deals.” Like momma said, “If it sounds too good to be true…” Also, if a sub prime lender is the only one that will give you a loan, then you really shouldn’t be getting the loan.

Personally, I used to have an adjustable rate mortgage, so I understand their appeal. The difference is, I did my research and switched back to a fixed mortgage once the rates had dropped back to the level I was waiting for. Also, my home had enough equity to where I could get a loan for up to 80% and still live comfortably. My parents gave me this rule when buying a home or car:

A home should cost no more that three times your salary

A car should cost no more than twice your salary

In practice, I haven’t gone close to that high on either. If only those 250,000 families had spoken to my parents first…