Friday, August 29, 2008


I know there have been many articles and essays written on the current mortgage mess in our country and what caused it. However, I haven’t seen anything that gets to the heart of the issue really.

The re-setting of interest rates is having a huge negative effect on our country. This is not news to anyone. All this is brought on by a combination of the mortgage companies wanting to make more loans and finding ways to make the loan less expensive to the consumer i.e. have a lower payment. The consumer of course jumps at the chance to get more house for the money!

Techniques have been used such as the adjustable rate mortgages; interest only mortgages; and even loans where the consumer sets their own payment amount (even if the amount they decide to pay does not cover interest!). Now that interest rates have risen and the early low rate years have burnt off, payments have gone up and many consumers are having trouble paying for their home.
All this is evidenced by the rising delinquency and foreclosure rates.

Let’s also not forget about the many advertisements for furniture and other hard goods that encourage the consumer to “buy now and pay later, no payment due for two years!” Are you kidding me? How does this make any sense?

So what is new? Well, I think that the basic problem is that we have forgotten the definition of “a loan”. We have confused it with the definition of “a gift”. Webster defines loan as “a: money lent at interest b: something lent usually for the borrower's temporary use”. Webster defines gift as “something voluntarily transferred by one person to another without compensation”.

Wow! What a revelation! All of my bank training as a credit person has been such that loans are made to be repaid and if you aren’t able to repay the loan then you don’t need or deserve the item you want to purchase. This is true for people as well as businesses. The flip side of this is that the lender should make loans that start getting the principle back with the first payment so that the borrower begins to build equity.

I have financial planning clients who argue that an interest only mortgage is the way to go since they will be just “using the home for 10 years” and sometime before the 10th year they will be in another house. Sounds good? Have they bought the house or are they really just renting it? What about actually paying for the house and owning it or it’s successor by the time they retire? Are these foreign concepts to today’s younger consumers?

I think we need to get back to living within our means. A loan is a loan and a gift is a gift and never the twain shall meet! So, the next time you are faced with a desire for an item, be it a car, a home, furniture, etc., be sure you can pay it back, starting immediately. And be sure you can pay for it in less than its useful life. Businesses, you can start the ball rolling by not “giving” the money away!