Subprime Responsibility

Back in August, when the “Subprime Meltdown” was just getting underway and people were trying to figure out what to make of it, I read an article on a blog I visit daily (which one? I don’t remember, honestly, I just remember the article pretty vividly) that talked about a man in the midst of a crisis.

He had just bought a home at an insanely low interest rate. By itself, that isn’t a problem, but the man’s monthly payments worked out to be $2,500 or so a month. That isn’t so terrible, really, for a home, but that $2,500 a month works out to $30,000 a year in mortgage repayment. This guy, who they were talking to, was making $37,000, meaning that if every penny he made came home with him (and we know Uncle Sam isn’t having any of that) he would have $7,000 left for the entire year for food, clothing, utilities, and other essentials for his family of three. His wife wasn’t working at the time, meaning his was the only income.

When questioned about it, the man said he was hoping for rental income from a finished basement that he was hoping to get approximately $700 a month for. If you factor that into the equation, he was trying to pay off an $1,800 mortgage at $21,600 annually if he was able to rent out the basement and if the renter paid his rent regularly.

The bottom line, of course, is that this man couldn’t afford his mortgage. The income bracket he falls into means that Uncle Sam takes 25% out of his paycheck. The minute he “bought” his home, he couldn’t afford it. The minute he turned the key for the first time, he locked himself into hopeless debt that there was no way out of.

There’s a reason I bring this story up, though. Consistently, since the “meltdown” (sorry, I don’t have any superlative splashy graphics to accompany the word like the cable news outlets do), we’ve heard about the practices of predatory lenders like Countrywide and others who offered mortgages to people who couldn’t afford them. They knowingly put homes in the hands of people who could barely squeak by on the payments at the low introductory rate most likely knowing they would also be able to foreclose on the house and get it back to give it to someone else and the cycle starts anew.

I’m not denying the existence or problem of the predatory lenders who turned the mortgage industry into their own little game of Russian roulette. Hell, I worked in the real estate business for a short time and I can tell you first hand that we often would justify people as a “good risk” based on very little just to close the deal. Were they all? Luckily, a lot of them were, but we often made loans (through our partner mortgage company) that were risky for us as far as the client’s ability to repay them. In the end, though, Countrywide and others didn’t have their loans pan out so well for them, whether intentionally or unintentionally, and that’s why we’re in the spot we’re in today.

But what of personal responsibility? If I were making $37,000 a year and sat across a desk from a guy telling me that on my $28,000 post-tax salary, I’d have to make $30,000 in mortgage payments every year effectively wiping out my entire salary and any money to be spent elsewhere on essentials other than housing, I’d laugh him right in the face and tell him I was moving on to something more realistic like renting. Many of the people whose homes are being foreclosed upon, however, didn’t have the foresight to say “Hey, if I give you 120% of my salary, I won’t have anything left.” They started their mortgage without the ability to afford it, and their head only sank further below the water line when the adjustable rate went up a few months or years later.

Has personal responsibility taken any role in this story? Not for the mainstream news outlets. As far as their concerned, this is a cut and dry case of people being prayed upon by evil rich banks who want nothing more than to keep the little man down. In the end, though, it’s probably equal parts lenders and borrowers that are to blame. If you get in over your head, there’s only so much you can blame the water.

Today, a video is passing around the internet from the BBC that breathtakingly talks about the housing crisis in the United States.

Look at the first person. She works one day a week and is convinced that all she needs is a car to make it easier to go to work. That will be the product of her saving money. The second woman couldn’t make ends meet because her husband got sick. The guy who sold his house sold it for way less than he paid, paid off his bills, and then couldn’t afford to live elsewhere.

In other words, none of the three people highlighted could actually afford the houses they were living in.

At what point does personal responsibility play some role? You have a strong case if you say that the lenders made the mortgage in a predatory fashion (if their financial circumstances when they got the loan are the same as they are now) and I’m not discounting the fact that there are scumbag lenders out there.

I just want to know at what point do these people become responsible for the situation they’re in.

Or do they?