Tuesday, August 21, 2007

Subprime Mortgage Fallout

Last week Federal Bank President William Poole commented on the state of the subprime economy. He stated that the subprime mess had not yet necessitated an interest rate cut nor was it harming the US economy. He was of the opinion that unless the economy took a major dive a rate cut was unnecessary. He also stated people needed to realize the fallout of the subprime mess was bound to happen.

I wonder whose to blame in all this mess? Is it the borrowers? The lenders? Should the Federal Government step in? And if so will it really work or will it be a band-aid solution?

I am going to comment on my mini-poll. There were 49 voters, and it appears that 62% of borrowers spend less than 20% of gross income on housing. Another 20% spend between 20-30%, 8% between 30-40% and 10% between 40-50%. So if this were representative sample of the population, one could say that the people who fall in the 30-50% range are probably subprime or risky loans.

But that represents ~20% of the population. So out of that 20% the question would be why do they have such loans? Are they able to easily manage it? What made them choose such a large mortgage?

I think that a lot of responsibility for these subprime mortgages needs to fall on the borrowers. Much like credit cards people need to realize that buying a home is the single biggest purchase you'll ever make. How can you spend less time choosing a house/mortgage than buying a couch? Or TV? Or anything? Buying a house without being educated is crazy.

But maybe I'm wrong, maybe people shouldn't bother to even read information before buying a house. Maybe it completely is the lenders fault. However I wonder if you see the mortgage number on the line, how can you believe you can afford it? If it's already 50%+ and an ARM how do people justify it?


Anonymous said...

not to justify spending 50% of your income on your house, but really, in some parts of the country, the incomes aren't that much more but the houses are. So I'm not surprised that I'm in DC, I didn't buy before 2002, and my mortgage is 28% of my income. If I were in des moines I'm sure it would be lower. I know my income would be lower too but probably not 1/2 or a 1/3 like a house would be.

Living Almost Large said...

I live in an area that is expensive and salaries are not higher necessarily. But I suppose it's the choice of being able to work for more than one company.

If we lived in Chicago or Indianpolis, we could get paid almost as much, have a substantially cheaper cost of living. That would be awesome. But there are only one place to work so we'd have to work at the same company.