A Mortgage Crisis?

The Mortgage Crisis?
After several robust years for the housing and mortgage industry, it would seem that the housing market is collapsing according to the media. There have been many reports warning of a possible economic collapse because of the housing market experiencing a slowdown. I would like to analyze a few facts that may help to shed light on this situation.
Although many mortgages this year have been defaulted on my homeowners, the vast majority of foreclosures are subprime loans. These types of loans are issued to borrowers whose credit scores are not on the most coveted level. Many times loans underwritten to these borrowers have very high interest rates or adjustable rates which go up whenever interest rates are raised. According to an article in USA Today,[1] one of the large lenders impacted by the slump is Countrywide Financial. Angelo Mozilo, CEO of Countrywide, issued a statement that the company was out of the subprime business. Because of the high volume of borrowers defaulting on their loans, the company was later forced to layoff up to 12,000 workers. At the end of June, 2007, nearly 25% of borrowers were behind on their payments to the lender.
In spite of this market squeeze on the borrowers and lenders, the larger component of the market involving conventional loans has not suffered greatly because of this. Most conventional loans were on fixed rate loans and were not affected by the adjusting of interest rates of the housing bubble burst. People who had existing conventional loans or were about to apply for them usually had much better credit than those in the subprime market.
Many consumer advocates in the marketplace advocated government intervention
http://www.usatoday.com/money/economy/housing/2007-09-18-countrywide_N.htm?csp=34
while charging that many lenders were engaged in predatory lending and should be more regulated. Although I do agree that sometimes lenders do take advantage of people who are not familiar with the borrowing practice, sometimes the issue of personal responsibility must also be advocated. Often borrowers sign on the dotted line assuming that the low ARM mortgage that they are starting out with may adjust in the future without preparing for that possible scenario. Contracts offer full disclosure and borrowers need to make informed decisions before signing any contract.
While I do believe that some government regulation is needed in lending practices, I do not believe that the government should be involved in mortgage bailouts. Many politicians toyed with the idea of introducing legislation that would have provided financial assistance to people facing foreclosure. Although their intent may have been noble, I have not been persuaded that this is the answer. Government should not be the first place to look for help. Rather, good decisions and responsibility play a very important role. The more that government involves itself in providing assistance to those who have had a crisis confront them, the more personal responsibility and free market solutions are pushed to the side. The beauty of a free market society is the fact that bad decisions are usually not made over and over. Subprime lenders and borrowers alike have adjusted their practices because of this year’s events. Who is to then say that other people that have a crisis hit them should not be eligible for assistance also?
Personally, although my wife and I have no debt, we have decided to rent for some time until we can save up at least a 20% down payment before we purchase a home. I’m sure we could qualify for a conventional loan much sooner, but the stability of having good equity starting out is much more comforting to me. A payment not to exceed 25% of my income would be the most ideal scenario. In this instant gratification society, often the younger generation immediately purchases what may have taken their parents a lifetime to accumulate. By obtaining massive amounts of debt, consumers considerably lessen their advantage to succeed.

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