Friday, September 26, 2008
Tales from the crypt of what used to be our thriving economy.
I should have focused on a financial career. I could have became the head of a bank or mortgage lender, gave loans to every Tom, Dick, and Harry that applied for one, collected my bonuses, and then when they couldn’t pay any more cut my losses and go and let someone else clean up the mess. This is basically what every major mortgage lender has done which has led to the downward spiral that our economy is on. It is very perplexing to me, as well as many other people who just can’t get their head around this. I think aside from being confusing it is hard to comprehend that this could have happened in the US, but it has and it can’t be mended with a band aid. This is my extremely simple explanation of the major contributing factor that has brought us to this point. This is the way I understand it from all of the political magazines and money reports that I read.
Okay first you have Suzie and Johnny. They have just gotten married and are ready to take the next big step, which is home ownership. They go to the bank and apply for a loan. Now the lender takes into consideration both of their incomes to come up with a higher mortgage and allow them to get a higher priced home. Back in the good old days when it was actually harder to get a mortgage loan they considered one income, which made sense because if one lost their job then the other one could always pick up the tab. Or you had a lot of collateral to offer and if you ended up not paying the bank could seize your assets and it wouldn’t be a total loss to them. This might result in a lower price range but this was the smartest move for the consumer. However lenders got greedy and as their commissions went up the requirements for obtaining a loan went down. So Suzie and Johnny buy a house with a mortgage figured on both of their incomes. Everything is going smoothly for a while. Credit card offers come quickly, along with even more lines of credit since they have a loan in the first place. Being of sound financial mind they only get one credit card for emergencies. As the months go by their credit limits build since they always make timely payments and everything’s all happy. They get a furniture set on sale and finance this since they have been managing so well and they figure they’ve got it covered. Then Johnny’s company lays him off because they are moving to Mexico. Why stay in the US and pay Americans what their worth when you can go across the border and pay Pedro 25 cents to do the exact same job? Big business has gotten greedy yet again. So Johnny draws unemployment for awhile until this fizzles out. He can’t find another job because the job market sucks right now. What jobs are available are being filled quickly and those are few and far between because Johnny’s company wasn’t the only one that left the country. Suzie’s doing all she can to cover that fancy mortgage payment with her income, but since it was figured on both of their incomes she can’t reasonably pay it. They pay everything they can with the credit card until it’s maxed out, eventually they max out all of their resources and they are drowning in debt. The cause of all their problems was started by this massive mortgage payment so they do what they have to, which is just mail the keys in and walk away. Now since they had no collateral in the first place they have nothing else to offer the bank so they are left holding the bill.
The second example is Pete. He passes by a house one day and decides he wants to buy it. He goes to the bank and says I want to buy that house. He has no collateral, no down payment, and has been working steadily at the same job for a whopping six months. Mr. Lender tells Pete to sign on the dotted line because he meets the current requirements for obtaining a mortgage loan, which is a pulse. He takes the keys to his house, fills his new home with items purchased on all of his newly available credit lines and cards. He makes the minimum payments while it suits him to do so, but then he decides he’s tired of the obligation and quits making the payments on all of his bills and eventually his mortgage. He walks away from his home leaving the bank with another loss.
These are two really simple examples but it is the basic synopsis of events that have led to where we are at today. Basically a lot of people have done what Suzie, Johnny, and Pete have done and this led to a mortgage meltdown as banks keep accumulating more and more losses. Then they go bankrupt or get a bailout and leave someone else to clean up the mess. This has led to the miserable economy that we are in today and has also made us the laughing stock around the world for looking like idiots. Everyone got greedy and now it’s time to pay the piper.