Friday, February 22, 2008

Who's fault is the defaulting?

I'm watching a little bit of the Democratic debate last night, since it was in Austin. Obama is giving his opening remarks and mentions that he met with a couple in San Antonio whose house is getting foreclosed on because of predatory lending practices. WTF? "Did you hear that?" I asked Doug. He said he tuned out as soon as Hillary started her remarks. I replayed the comment. Predatory lenders.

Let me get this right. You have poor credit. You decide to buy a house that you can't really afford. You decide to take out an adjustable rate mortgage that is really low when you take it out, so you can make those house payments, but the rates will go up. Now that they have gone up, it's the lenders fault that you can't make the payments? Get real.

I know this is a rough situation. And yes, it is partially the fault of lender. They qualified risky applicants. They probably also did a huge sales job. Still, the borrower has responsibility in this as well.

Recently we were talking to some mortgage companies about refinancing our home loan. One of Doug's work friends recently refinanced his home and got a 5% rate; he thought we could do the same and it would cost us less than $1,000. Save 2% on mortgage, why not?

Calling around, the rates were up to 5.75%. And while it would only cost us $750 out of pocket, the rest of costs would be rolled up in our loan. The actual cost would have been about $2,500. Even with the monthly savings, it would take us 24 months to break even on this. We were hoping to move to a different house by then. We decided not to go forward and instead take the cost and put it straight to our principle. Any other savings, we'd use to fix up the place. The refi just didn't make financial sense.

Of course, the lenders made it sound good. Get a lower rate and pay only $750. This way you are paying less interest and more principle each month. They do try to sell it. They make it sound good and put a shine on it. But is that predatory lending?

It is up to the borrower to know what he/she is getting into. When we bought our house, they qualified us for way more than I would have expected. However, we opted to go with something much smaller, something we could afford on one income, and after the tech crash, that has served us well. I don't know if we could have kept a more expensive house. They also offered all sorts of mortgages that sounded great, but we weren't buying. No ARMs for us. We wanted a 30-year fixed. And we got what we wanted.

I call banks and lending institutions a lot of unflattering things, but predatory is not one of them. When it comes to your money, you have the say and you have the right to agree to the terms or walk away. Get smart when it comes to your money and don't fall into this victimization trap just because you won't take the time and effort to become educated on money. It's not predatory lending just because you didn't know what you were doing.

No comments: