The Alabama Moderate

Painting the Red State Purple.

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Archive for August 16th, 2007

Common Sense in Lending

Posted by ALmod on August 16, 2007

Now that the Dow is taking a nose dive in a much needed market adjustment (it was going up too far too fast), everyone seems to want to talk about mortgage lenders and how they might go bankrupt.  My thoughts?  They should.  They practiced bad business, and anyone who practices bad business deserves to lose in the business world.

I know.  I sound mean, but hear me out.

If you run a business, you run a business to make money.  Lenders make money by lending money to people who need it and will pay it back with a fee (interest) for borrowing that money.  Considering that the person you are lending to is supposed to pay you back more than what was originally borrowed, it makes sense to lend to those who are most likely to pay you back.  It’s a very simple concept, and it’s why you make a hefty down payment and pay your bills on time.  If you have a history of not paying your bills and have very little income, you are a bad credit risk, and people shouldn’t lend you money unless they don’t expect to see it again.  Sure, folks can be nice and let you borrow, or they can take advantage of the fact that you are rebuilding your credit and charge you  some unbelievable interest rates, but when they do so, they are taking a risk themselves.  It’s a spin of the roulette wheel, and when you gamble, you have to be prepared to lose.

Such is the situation with the “sub-prime” mortgages that were ever so popular just a few short years ago.  I’d never heard of an adjustable rate mortgage until my husband and I started shopping for our first home.  Interest rates were at an all-time low, and we both had excellent credit scores and very little debt.  So I was shocked when the first company we shopped offered us a 80/20 loan, with 20% being an adjustable rate.  We were sold the same line of being able to refinance later.  I wasn’t buying.  I told the woman on the other end of the phone that if rates were at an all-time low, the only way the rates would likely adjust would be up, and I wasn’t interested.  We went to our bank the very next day and were pre-approved for a nice fixed-rate mortgage loan.

But some people did buy into those adjustable rates.  Those loans were given to many people who were high credit risks, and those people are now unable to pay them back.  Why all the surprise from the industry?  You hit on a 17.  Should you be shocked and ask the house to bail you out if the dealer gives you a queen?


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