Thursday, April 12, 2007

Mortgage Foreclosures: Subprime and Job Loss Not the Real Reasons

As usual, the mainstream media manage to be several years late to the housing bubble story—and still get the story wrong.

The better than average Investor’s Business Daily helpfully mentioned that job loss might better explain recent foreclosures but even they missed the main point.

The borrower’s bad behavior is the main reason for the borrower’s bad situation.

Bad loan terms and job loss problems are only symptoms of the borrower’s bad behavior:

  • If you chose bad loan terms of 50% interest but you only borrowed $1, it is unwise but not dangerous.
  • If you lost your job a year later but only owed $1 and change, it is annoying but not catastrophic.

The true problem is overconsumption, buying a $500k house on a $250k budget.

Buy a $125k house on a $250k budget and adjustable rates or job loss will not mean foreclosure.

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