MY TAKE ON THE MORTGAGE CRISIS By Christina Mae Olson, CFP®
I don’t know what irks me more these days: the debate in our state and federal legislatures over health care funding or the mortgage default crisis. How can we accept it in Wisconsin knowing that 500,000 people (10% of our population) do not have health insurance? The national number is 49,000,000 (16% of the population). These numbers are growing every day. How many of the uninsured are LGBT citizens? How many are children of our LGBT community? We must address this problem. You know the old saying, “if it ain’t broke don’t fix it?” What’s the opposite? “Why keep it if it’s broken?” Our health care delivery system is broken and we must fix it. This gargantuan problem is about HEALTH CARE – not about health insurance. Look for my take on this in a future article. This month I want to address the mortgage foreclosure crisis. I promise to write about health care solutions in a future article. First, some facts.
FACT: The Fair Housing Act (Title VIII of the Civil Rights Act of 1968) dealing with property for rent or sale does NOT protect against discrimination on the basis of sexual orientation. No federal law protects LGBT people in housing or lending practices. Some states, however, do have laws protecting gays and lesbians from discrimination in housing (Minnesota and Wisconsin included). Minnesota even has a law protecting transgender people (Wisconsin does not) from discrimination in housing.
FACT: The federal Equal Credit Opportunity Act does protect borrowers against discrimination based on marital status. Does this apply to LGBT couples who borrow money together? We are about to find out. A lesbian couple is suing Countrywide Mortgage in Maryland invoking this federal law. One woman sought to add her partner to her mortgage. Countrywide told her, among other things, to first add the partner to the deed. They did this. Countrywide then called the loan due (with an $80,000 balance) in 30 days because they did not recognize domestic partners as family. Countrywide said they had breeched their contract by changing the deed. How many of you own property deeded in both of your names? How many of you are joint borrowers on a mortgage or other loan?
Some of you may remember a story I wrote about being sued. My partner and I had applied to refinance our home mortgage when interest rates were below 5% on 30 year mortgages. Yes, there was a brief window of time a few years back when rates were this low. I had negotiated our deal to the hilt and our lender was so frustrated that he actually filed a suit in Outagamie County – naming only me – for being a “tenacious bargainer.” He felt I had bargained him out of a suitable commission for putting this refinance in place. Our deal fell through and he wanted to get paid for the work he had done. We didn’t pay. He ultimately dropped the suit. Whew. What an ordeal. I’m so glad we did not do business with him.
So many factors were involved in today’s “mortgage crisis,” including aggressive and inappropriate underwriting by lenders. For one thing, market values of homes all over the country are dropping. They are dropping in the Midwest but not as fast as on the coasts and in the bigger cities. Houses are taking much longer to sell than they used to. What used to be a seller’s market has become a buyer’s market. People owe more on their mortgage than their house is worth! Mortgage interest rates are rising now. Michelle and I refinanced our mortgage three times in 3 years when rates were dropping seeking the lowest rate possible. Mortgage companies were competing so hard for this business just a few years ago. Now, these firms are closing their doors and going bankrupt. The broker in Appleton who sued me filed bankruptcy three months ago.
What happened? In the frenzy to take advantage of such a hot real estate market – we bought homes we couldn’t afford and financed them with mortgages too rich for our pocket books. We took out home equity loans with adjustable interest rates. Borrowers were sometimes lured into so-called “sub-prime” loans – loans with interest rates actually lower than the national going (prime) rate. Some lenders wrote loans for 125% of the value of the home. Most of these non-traditional/non-conforming/unconventional loans were also adjustable rate loans. Most of these loans were sold to people who could not qualify for a traditional mortgage – due to being a higher credit risk. Huh? That doesn’t make sense. Why bend the rules and make it easier for someone with bad credit to borrow money? Why are you applying for credit when you haven’t been able to handle credit in the past? When the prime rate went up – so did the payments on these loans. Now, people can’t pay their mortgage because their payments have increased, doubled in many cases.
The federal government is now proposing ways to bail out these failing mortgage companies and also individual borrowers who are in default on their loans. It makes me sick to think that even more of our tax dollars will be going to companies and even individuals (some of whom are my friends) who made horrible financial decisions about credit. How many millions or billions of dollars will be pledged to this? The best solution to this problem should have been to never have gotten into it in the first place. Prospective buyers should have continued to rent if their credit wasn’t good enough for a traditional mortgage. Home buyers should have bought houses within their budget – paying 20% or more down to secure some equity. Lenders should have been stricter in choosing their customers and should have said “no” to borrowers with poor credit.
We have seen this problem before. Remember the Savings and Loan crisis in the 1970’s and 1980’s? Fraudulent and shady lending practices led to many S&L’s going bankrupt. Neil Bush – brother to George W. was one of the shady characters in this saga. He was the director of Silverado Savings and Loan. Silverado collapsed in 1988 costing taxpayers $1.8 billion in their bailout. The federal government authorized bail outs to these lenders to the tune of $125 billion at the time. Come on folks – our lesson is to only take on what we can handle. We, as individuals, must take responsibility for our own financial situations. Be very careful about borrowing any amount of money. Know what the terms are and the consequences if your finances change.
Chris Olson is a Certified Financial Planner™ practitioner with a fee-only private practice. You can reach her at 608-525-9818 or CMOney@centurytel.net.