Mortgage Mess - An (Almost) First Hand Account

With the financial meltdown resulting from the housing bubble deflation and concomitant mortgage defaults, all kinds of scenarios for the failures have been put forth. Financial and economic experts have pointed to the shortsightedness of some of the banks involved ('No document' loans, where borrowers didn't have to prove they had the income to service the debt; shady mortgage brokers 'cooking the books' to make borrowers appear to have more income than they did; speculators buying properties to flip using sub-prime or interest-only loans, then finding they couldn't unload them; otherwise conservative banks getting involved in a derivative market – sub-prime mortgages – that they didn't really understand, and a host of other causes.)

One cause talked about now and again is the 'eyes bigger than the stomach' effect, where buyers were qualified for mortgage amounts that would strain their budgets to the limit. Many of these were based more upon a borrower's credit scores and less on their income.

How do I know this?

Because it almost happened to us.

When we first started house hunting in late 2004/early 2005 we decided to pre-qualify for a mortgage before we'd even start looking at homes. Frankly, we were stunned to find we could get a $300,000 mortgage. At first visions of large houses with lots of land flashed before our eyes. Then reality kicked in.

A $300,000 30 year mortgage at 5.65% would give us payments of around $1,800 per month. I don't know about you, but that's some major chunk of change for us. That figure doesn't include tax and homeowners insurance escrow, which would add up to an additional $700 to $900 per month. It would have made for a very tight budget, requiring both our incomes to make ends meet. We would have no cushion, meaning if one of us lost our job we wouldn't be able to make the payments. There was no way we were going to put ourselves in that kind of bind.

In the end we settled for a house much smaller than the mortgage broker said we could afford, and a large down payment kept the mortgage amount and monthly payments to a reasonable level where, if need be, we could make payments and pay the bills on one income.

We did the smart thing.

But how many others didn't? How many used the entire amount of that oversized mortgage to buy a house they really couldn't afford? How many found a large portion of their disposable income going to mortgage payments, leaving very little else for things like day to day expenses? How many had no margin for unforeseen circumstances, like the loss of a job or emergency repairs to plumbing, heating, electrical, and the like? I think the answer is obvious: far too many.

Both Deb and I have discussed the house we bought, and the fact that we could have gone for a somewhat more modest home which would have made our mortgage payments even smaller and our property taxes lower than what we pay now. Once BeezleBub is out on his own, we may do just that.

Over all, we have no complaints...other than the land upon which The Manse is located. Frankly, I would have liked something flatter. I don't mind being on a hillside so much, but the landscaping performed when the house was built leaves a lot to be desired. But if that's my biggest complaint, then I really have nothing to complain about at all, do I?