"I Couldn't Help It.
I Can Resist Anything Except Temptation."
"I Couldn't Help It. I Can Resist Anything Except Temptation."*
— Too Many American Consumers and Homebuyers
I trust you know by now that a minor earthquake has rippled through the credit markets, touched off by troubles in the "subprime mortgage" area that serves higher-risk borrowers. Let's take a cautionary look at how the industry works, what went wrong, and why. You won't be surprised to learn that biblical financial principles were abandoned on a massive scale.
Most homebuyers obtain their financing through a mortgage broker. These firms typically don't lend their own money; they borrow from a bank and lend that money to homebuyers in return for their mortgages. Then they find a buyer for the mortgages (institutional investors such as pension funds, insurance companies, mutual funds). The mortgage brokers take the money from the institutional investors, pay off the bank, pocket the difference, and begin the cycle all over again. The banks make money on their loans, the broker on his middleman role, and the big investors get the monthly mortgage payments, resulting in higher returns than are available from Treasuries and most bonds. Everybody wins.
On the homebuyers' side of the equation, you've got the majority of borrowers with solid credit histories (folks such as yourselves, I'm sure) who are considered to be "prime" borrowers. These are the people who can put up larger down payments and get the best rates. But there's another group of aspiring homeowners who, due either to past mistakes or misfortune, don't enjoy favorable credit ratings. These borrowers are "subprime" and their loans, when made, typically carry interest rates that are 2%-5% higher than prime loans.
Earlier in the decade, mortgage brokers were sensitive to the risks of doing business with subprime borrowers. They required proof of income and sizeable down payments. But as time moved along without major credit problems arising, the institutional investors found the "subprime" area of the mortgage market particularly profitable. Give us more, they said to the brokers. So the mortgage brokers began tinkering with their requirements in order to generate more business. If the subprime borrowers couldn't come up with 20% down, no problem—how about 10%? If even that's too much, how about 0% down? If the monthly payments are still too high, we'll not ask you to make principal payments . . . how does paying interest only sound? If it's still a stretch, what if we give you a 3% rate for the first year or two or three and we'll adjust it to your permanent rate after that? If you don't like your new, higher permanent rate, well, hopefully your credit will have improved and you can refinance into a traditional loan at that time.
And so it went, with increasingly lax requirements introduced incrementally along the way. The campaign had its desired effect as the percentage of subprime mortgages almost doubled—from about 10% to 20% of new loans—over the past few years. On the business side, the profits for all concerned grew handsomely. On the homeowners' side, more people than ever could get mortgage financing. Unfortunately, everyone kept pushing the limits until there was just no margin for error left. Too many loans had been made to too many subprime borrowers in too many areas where the housing market was weakening.
In 2006, the music began to slow. When the low teaser rates ended and the loans were reset at the higher rates, more than one in ten subprime borrowers couldn't keep up their payments. Their home values weren't rising so there was no additional equity that could be tapped via a refinancing. Foreclosures spiked, meaning even more "for sale" signs in an already slowing market for home sales.
Before you join the chorus condemning the "predatory lending" practices in the industry, reflect on the fact that none of this would have happened without a very large number of homebuyers making a very large number of poor financial decisions—failing to save for a down payment, buying more expensive homes than they could afford, stretching their debt obligations beyond what was prudent, rolling large auto and credit card debt into home refinancings, and having no emergency funds to deal with unexpected setbacks. This is yet another sad example of the possible consequences awaiting those who ignore God's protective principles for avoiding surety, minimizing debt, and saving for
the future. Take heed, my friends. 
*As the more scholarly among you may know, this line actually appeared in "Lady Windermere's Fan", a play by Oscar Wilde. I first saw the quote in my high school yearbook referring to a mischievous and trouble-prone classmate. It's been a favorite excuse of mine ever since.
- Got a question or comment about this article? Discuss it on our Message Boards.
