Tuesday, 14 October 2008

Greed = Stupidity

I’m getting tired of the credit crunch stories now. Every day we hear of cases where people are having to sell their homes because they can’t afford their mortgages, even though they’re in negative equity and will still be paying for something they no longer have for a good few years to come.

Yes, I think it’s sad when hard-working people who are simply trying to create a decent home for themselves are hit by this but isn’t it a fact that if you take out a mortgage that you can’t afford to pay, then you’ll have to forfeit your home? Didn’t these people know that before they went to the bank?

Once upon a time you could borrow around 3 times your income up to about 80% maximum to invest in a property. In other words, you had to actually save for a deposit and BE ABLE to repay the loan but 100% mortgages eventually became the norm, being offered to all and sundry regardless of income and repayment ability. Surely, if somebody borrows more than they can reasonably afford then it’s their own look out when they can’t keep up the payments? And similarly, if the banks are stupid enough to lend money to people who don’t have the means of repayment, shouldn’t it be their loss when things go tits up?

Yes, I know that interest rates have risen but anybody with any sense surely knew that was a possibility when they take out a mortgage? Shouldn’t they have calculated with that possibility before they dived in? Or is the desire to own property so strong that we’re willing to risk anything for the sake of it? People say they want the security of owning their own homes but in all honesty, I feel a whole lot more secure in my rented property (housing association with secure tenure) than I would in a mortgaged house that I couldn't afford.

Just a few days ago I heard of a case where a woman was offered, before the credit crunch, a ‘self assessment mortgage’. Her mortgage broker put her income down as £95,000 even though she actually earns just over half of that. Shouldn’t mortgage brokers who advocate this kind of procedure also be held responsible when problems arise? And what have credit institutions been thinking when they’ve been willing to throw money at people without even checking their income? Not that those who took out self-assessment mortgages based on fabricated figures are innocent - far from it - but why on earth should the tax-payers have to bail out the banks because of their own stupidity?

If people had just stuck to what they can afford (and I’ve lived beyond my means before so am not entirely innocent either) instead of thinking they deserve a big house, better car, luxury holidays or whatever, then this housing crisis would never have arisen. Banks wouldn’t have had the opportunity to lend more money than people could afford to repay and nobody - with the exception of the few whose circumstances have changed drastically since taken out a mortgage/loan - would be in danger of losing their home or spending sleepless nights waiting for the bailiff to knock.

If you ask me, greed is synonymous with stupidity, whether it’s on the part of the banks or the borrowers themselves.

Sharon J


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Caroline said...

I couldn't agree more, Sharon. I've got plenty of friends who have continually borrowed against the growing equity in their houses over the last few years to fund holidays abroad, new cars, you name it. Unbelievable! And now they're paying the price. If only there were a tax on stupidity, our country would probably not be in the state it is in today! Caroline x

Sharon J said...

A tax on stupidity! Now there's a thought ;-)

Sharon Rose said...

Hi there-a very interesting post and you are so right too.

R said...

I so agree with you! This is just what my mum and I were talking abut over dinner this evening... when I took out a mortgage I was a single-parent-student with a 100% mortgage, and whilst at times it was hard, at least I hadn't been stupid enough to overstretch myself to such an extent that I truly couldn't afford to repay what I had too, it just meant I had to be very careful with money and forego even the smallest of luxuries

It was, however, a very happy time in my life, as instead of spending money to enjoy life I spent time and effort and my son has grown up to be a happy, well rounded young man with a sense of fun and a sensible attitude to money as well

This whole attitude of 'have it now and worry about paying for it later' seems to be coming home to roost. I hope that maybe people will learn from the current situation enough that this crisis and that the world doesn't get into such a mess again

I do feel sorry for people who, through no fault of their own or the banks etc are in difficulty, as opposed to those who have been taking on more and more credit for things that aren't really important, just ideals from marketing bods

I like the idea of a stupidity tax too!


Lizzie said...

The major part of the blame should surely go to the companies/brokers/advisers who the 'stupid' people went to for advice when they knew their own limitations? Some may have been greedy, others desperate, some just didn't understand what they were getting into. They had no idea where interest rates could go.
Perhaps some financial literacy classes would benefit us all? Credit is ridiculously easy to get here, even now. We just dont learn.

neimanmarxist said...

oh, it is all such a mess. though i can't help but point out that the pervasive culture is that these 100% mortgages are a way to "make houses affordable". I mean, of course they're not, but the predatory lending practices must also carry some of the blame. that said, i agree. if you make $45,000 a year, chances are you can't afford a five-bedroom monstrosity in the nicest part of town, new furniture and a german car. i see people up to their necks in debt because they are making such purchases on such salaries all the time.

WebSmith said...

Lenders know that people want to live the dream and are eager to believe whatever they are told. "ARMs have typically only gone up 2%. You have a history of increasing your income and your income will most likely increase along with the mortgage. If you get in trouble you can always sell the house and the way house prices are going up, you'll end up making a bundle. Don't worry about all of that stuff. We'll fill it in for you. The government has mandated that we do whatever we can to help you buy a home. Just sign here and don't worry about it. You'll get the keys to you new home within a couple of weeks."

The real problem, of course, is not the mortgages. They are being used as a scapegoat. The credit base economy that has been created will only continue to exist as long as the banks are able to lend more and more money. The video at the bottom of this page explains it so that anyone can understand what has happened.


Sharon J said...

@ Sharon Rose. Thank you. One tries ;-)

@ R. Yes, it's those who have been careful but are still in danger of losing their homes (or already have) that I feel sorry for but it seems to me that the majority are those who have continued to use credit to buy into the 'want it now' culture. Saving seems to have become 'old-fashioned'. Glad you managed ok - it sounds as if you did really well :)

@ Lizzie. What a good idea! I wonder why the government haven't thought of something that simple?

@ Neimanmarxist. I agree about the predators (like the brokers who arrange 'self assessment mortgages' and persuade people to lie about their incomes. I can't imagine many people buy a house through desperation though.

@ Websmith. It's the whole credit thing that worries me, not just the mortgages, but losing your home is far more serious than losing your car or flat-screen TV. I've had plenty of credit in the past (and am still paying the price) and am still amazed at just how easy it was to get. Thanks for the link.

Crafty Green Poet said...

oh I so agree with your words here, well said

Lizzie said...

Hi Sharon
I am tempted to say ' they were too busy invading Iraq' but that would just be sour grapes and I would be no better than them!

As an aside, if there were no mortgages, ever, then house prices would not have risen out of our reach in the first place.


Anonymous said...

I couldn't agree more. There was a show on where a woman bought 7 flats in 1 day and now was facing losing her house.
It is the people living on near minimum wage who have had their jobs cut that I'm most concerned about!

Sharon J said...

@ Crafty Green Poet. Hi, and thanks for visiting. Nice to see a new 'face' :)

@ Lizzie. I believe that it's because mortgages were so easily obtainable that house prices spiralled out of control. Maybe what's happened now will at least make people think twice about borrowing more than they can comfortably afford although it'd have to get considerably tougher first I think (people seem to have short memories if things 'blow over' quickly).

@ Frugal Trenches. I feel sorry for those who are merely trying to make a decent life for themselves on a low wage BUT - and there will probably be many who disagree here - I do believe that the 'own your own home' culture has got out of hand. Owning a property brings with it a lot of financial responsibility and isn't something that I believe is the right way to go for those on a low income. It is, however, something that's been promoted by the government (thanks to Maggie) because it's cheaper than offering them good quality, affordable social housing.

Elizabeth said...

Excellent post, Sharon. I so agree with what you said - the 'greed is good' mentality (much lauded by 'dear' Maggie Thatcher) has been far too pervasive in our society for the past 20 years, and now the pigeons are coming home to roost. Mortgages should only be available to those who have managed to save at least a 20 per cent deposit, and should only be for 3x their annual salary.

Of course, the ridiculous rise in house prices of the past 10 years has made all home-owners feel they are 'rich', and has been very beneficial for New Labour as it gave the country a general feel-good factor and led to huge amount of reckless spending - both individually and by the government. I just hope when all this credit crunch is over people and governments will have learnt by their mistakes, but I won't be holding my breath!

Sharon J said...

@ Elizabeth. Maggie has a hell of a lot to answer for, that's for sure. The strange thing is, Norway had a conservative government at the same time and the same thing happened with property - he opened up a free market on what was once deemed affordable housing and suddenly a whole lot of people could no longer afford to buy thanks to those making a hefty profit from property they bought cheap.

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