Saturday, March 31, 2007

Subprime: The Business Falling Faster Than Britney Spear's Career

Subprime lending has received a considerable amount of attention from the major media lately. While I think that some of the negative attention is deserved, like everything the media needs a scandalous story and evil character to go after in stories. These lenders aren't without fault, but people are looking past the real issue.

Land contracts with balloon payments have been around for years in the lending biz. While I think excessively large increasing payments are ethically questionable. The biggest problems are 1) the lack of basic financial skills we possess as Americans, 2) people borrowing beyond their means and buying more house than they need, 3) eager lenders with relaxed lending standards.

Cheap, easy to attain financing is a great thing and one of the keys to people living the "American Dream." The problem recently has been that companies have extended this financing to people who were buying "investment property" or homes that their cash flow would not support. While the economy was growing fast and property values growing faster this generally wasn't an issue. As housing inventory increased the problems began. The subprime lenders had a problem in two respects first many people receiving loans were less than qualified and as the housing market turned and payments increased they were on the hook for payments they couldn't afford.

So why don't I think the problems going on now aren't the fault of lenders?

  • Whether at subprime rates or market rates, unqualified people will receive loans -- they may just pay extra for the risk associated.

  • Basic finance skills aren't taught in the U.S. Schools have a vested interest in teaching for tests which determines their funding. The vast majority of U.S. households are buried in "Bad Debt" with no signs of changing soon. Teaching fiscal responsibility needs to start at an early age. Americans do bestow the glory on those who take risks, but there are many more risk takers to fail than succeed.

  • People need to educate themselves. There are a slew of resources online, some better than others, they can help you learn about any number of topics. Personal finance is no different. Banks are required to disclose in plain English the payments and interest rate of a loan. If you are taking out a loan and can't determine if the monthly payments outpace your monthly revenues you need to seek assistance or not take out the loan.
There are always cases of predatory lending companies, but I'm talking merely about companies that lend to borderline individuals. Not those that make loans to people who are clearly incapable of ever repaying. I am also not trying to imply that bad things don't happen to good people. Real life happens and people can lose a job, fall into bad health, or fall on hard times. I think people need to be accountable for their own actions. Too often in the society we live in people are quick to point the finger rather than look in the mirror.

What do you think? Am I way off base?