Last night I watched the movie "Too Big To Fail" on HBO about the credit crisis that started in the U.S. in September 2008. It got me thinking about how this whole credit mess began and why?
To be specific, the crisis was caused by the banks loaning out too much mortgage $$ (zero down mortgages?) with the anticipation that real estate prices would continue to climb (and they didn't). The banks looked at it with the eyes that even if Mr. Smith could not make his mortgage payment, the banks could foreclose and get their $$ back. WRONG!
No one saw that the world economy would go into a lull, let alone the U.S. You see, the lending in the U.S. was such that people were starting to foreclose in record numbers because Mr.Smith had been told to refinance the house to buy the "toys" OR take out one of those newfangled "balloon mortgages" to cut costs until your house appreciates in value. WTH?
First of all, as you might ask, what is a "balloon mortgage"? Well, in a nutshell, a balloon mortgage is when you take a mortgage that has a very low introductory interest rate/payment that increases drastically after the first year or two is up. The new rate/payment is significantly higher than the original, causing the homeowner to become "house poor" and really in most cases broke! The only alternative for Mr. Smith would be to sell, however, his house that he had refinanced to the hilt two years ago, has now lost value (because there is a lull in the real estate market) and he now owes more than what it is worth! GULP!
How did this happen and for that matter why? I feel the basic answer is greed. Greed in the banks, greed in the average Joe wanting all the "toys", etc.
Unfortunately, in most cases, Mr. Smith will have to let the bank foreclose on the house and he will have to be out before too long. This is where we see the whole city blocks vacant with "For Sale" signs out swinging in the wind. Eery isn't it?
What have we learned from all of this disaster? I would hope it is to not over extend yourself (regardless of what the banks say). Be responsible for your own finances! An excellent rule of thumb is to have a budget (I have preached this before) with a "housing" amount. Whether buying a new home OR refinancing, find out what the new mortgage PAYMENT will be monthly (for your maximum qualifying mortgage amount). From this make sure that you can also put away some $$ for a "rainy day fund", in case you have to take a pay cut, or heaven forbid, lose your job. ALWAYS have some extra $$ put away somewhere that can be accessed easily (if needed) that can support your basic lifestyle for at least 6 months.
No one ever wants to repeat this whole disaster over again...and really, I am not sure that we have seen the end of it yet. Let's hope that from all this we have learned a valuable lesson...money does not buy happiness...ever!
Liz
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