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Subprime Mortgage Debacle There has been much wailing and gnashing of teeth recently over the problems with subprime mortgages. Subprime mortgage lenders are in financial difficulty, and borrowers are losing their homes. Congress is looking into the problem, probably with the idea of greater control and new laws and regulations. Some members have said the regulators did not do enough to stop the problem. Others have claimed that the problem was that consumers were willing to take out loans that they could not handle. The truth is that both parties are at fault, and, given the poor judgment, they have gotten what they deserve. Do a search on Google looking for lenders, and you will get many offers for loans that just do not make sense. One which seemed at first blush to make sense was by Quicken Loans, a $150,000 loan with payments of $745 per month (Quicken-Loans.biz 5/16/07), a payment substantially more than others advertising $200,000 loans with payments of $600 per month. However, if you amortize the loan over 30 years using the average interest rate as reported on Yahoo for that date, the payments leave a balance of over $140,000 due at the end of 30 years. You never own your home. What has happened from the lenders point of view is that they have drastically lowered standards for the people to whom loans have made and have been making loans which either will have to be refinanced with substantially different terms or will result in the sale of the house. Using the $150,000 loan with payments of $745 per month amortized over 30 years at the average mortgage rate, a person will have paid more than $268,000 over 30 years and paid down less than $10,000 on the mortgage. If that same loan were fully amortizing at the average rate, the payment would have been only about $890 per month, $145 more per month. The person would have paid only about $52,000 more over the 30 years, but have paid the loan in full. In short, both sides were making bad financial decisions, and they are reaping the results. There is no reason for Congress to step in. The blame game need not be played with the idea that someone was taking advantage of a poor consumer. The best thing is for both sides who suffer to learn and, in the future, make sensible economic decisions.
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