Subprime mortgages, predatory lending, a housing bubble, caused, perhaps, by irrational exuberance. Whatever. Credit, which has been in past years as ready as a child’s smile, is drying up fast. It’s a buyers market but few can qualify for the mortgage.
We hear daily drivel about those who can no longer buy into the American Dream. Well, for some, the dream can turn into a nightmare. Maybe they haven’t worked long enough or saved enough. Some folks might be better off to rent cheaply while they put away, say, 10 percent or so of their earnings and let it earn a little interest. While renting, one doesn’t have to pay property taxes, homeowner association fees and maintenance. Plumbing on the fritz? Call the super.
Meanwhile, blame is everywhere but remedies are few. Former Treasury Secretary Lawrence H. Summers wrote in the Los Angeles Times an interesting bit of history on financial crises, adding that it’s too soon to draw policy lessons from the current one or determine where in the cycle we are now. But he offers more questions than answers, blaming first the rating agencies for “dropping the ball.” Seems debt issuers pay for credit ratings and shop for the highest score. However, when mortgage brokers and real estate agents press to make the deal (so all can earn their commissions) a buyer’s credit worthiness is often overlooked. The lender doesn’t care because within a few months the mortgage will be bundled with others, rated as solid and sold to investor groups.
In the old days, if you wanted to buy a house, you met with your banker, who actually knew your name and probably your parents’ names as well. You told him how much you earned, what other assets you have, how much you could pay down (about 30 percent was average) and how much per month. Then he decided if it was a good idea for you to buy a house at all and how expensive a house you could afford. Very sensible. Few foreclosures. More happy homeowners.
Taking after my mother, who had a keen instinct about real estate investments, I set out to buy my first house when I was about 23. I’d saved all the winnings of my best jumper just as though he had lost and put them in a separate savings account. When I had about $5,000, I figured I should invest in a small house that I could rent for enough to pay the monthly costs. My mother went with me to her bank. She offered to pledge her savings passbook as collateral for my loan. The banker wasn’t so sure about the predictability of a horse’s earnings.
The deal was done; I rented almost immediately to a school teacher and continued to save my winnings. The market was fairly flat at the time, so I didn’t plan to make a bundle flipping it within a year. After I married and had my first child, I sold it for a little more than I paid, but enough to make most of the down payment on the ranch. The seller carried the first mortgage, amortized the payments as though it were a 20-year fixed (the interest rate was five percent). I continued to save up for the inevitable balloon payment that would come due in 10 years. After eight years, the seller had died and his widow needed some money. I told her that I could give her the cash she needed if she would extend the note at the same interest rate until it was paid. (At that point, interest rates had risen sharply.) That worked out well for both of us, but was only possible because, again, it was an agreement between people who met face to face, cared about each other and had established, over time, considerable trust.
After making a few other real estate investments following the Warren Buffet strategy- when the market is greedy, lie low; when there’s fear in the market, get greedy- I bought a little condo in Montana. I was offered a small down and adjustable rate mortgage, even interest only, but thought better of it. Instead, I used my existing equity line of credit to pay the whole thing, which, with the help of the son-in-law who shares my California house, was paid off before interest rates went up. Lucky. Never fall for the easy money, as my mom used to say.
Over time I’ve modified that to: Never let sellers encourage you to spend more than you can afford.
Anyway, now that the market lacks liquidity, as the experts say, I’m in a position to offer financing on the condo, which I’m not keen to sell, but realize this may be the right time. But it’s not a giveaway. The offer is only good to a buyer with a reasonable down payment and monthly payments that include some principle,
You might say I’m paying back to those who taught me to save and helped me out with agreements, made face to face, that benefited both parties. The market may have gone south for now, but I still have trust.