Wednesday, March 28, 2007

Laying blame on the American borrower … and a proposal for national education …

  Sometimes society needs a major embarrassment to whip it into shape.  After the debacle of the 2000 election, for example, an entire generation of Americans presumably will do a better job of checking their voting ballots before turning them in.  And the current mortgage foreclosure explosion should sober up the next generation of Americans about the risks of overextending themselves with mortgage debt. 

Housestreet    Last week I wrote to criticize lenders and to suggest a tightening our lending disclosure laws.  Today I write to suggest that a large share of the blame for the boom in foreclosures is attributable to borrowers who simply shouldn’t have taken the loans.  As reported in today’s New York Times and in a spate of other stories from around the nation, too many Americans have taken on mortgage loans that they knew, or should have known, were going to gobble up far more than half of –- and sometimes more than –- their monthly income.  Many of them are now losing their homes because they cannot pay back their enormous debt.

   Avuncular economists might say that these stories should be a lesson for American borrowers, and I have to agree.  Too many citizens appear not to have thought long enough about what they were agreeing to.  When I first considered buying a house, my father told me an old rule of thumb that one could afford a house only if it cost no more than 2 and ½ times one’s annual income.  This may be overly restrictive today, but any sensible person should realize that agreeing to spend more than half of one’s income on mortgage payments is a dangerous practice. 

   Perhaps law should reinforce today’s cautionary tales by requiring greater emphasis on teaching personal finance in the public schools (especially as many of the overextended borrowers appear to be immigrants and those raised outside of the mainstream American culture, where rules of thumb are taught).  We should educate young people that the marketed dream of “Buy now, worry later!” is irresponsible.  To have many Americans fooled once might be considered a problem of personal failings; for it to happen repeatedly would be a national shame …         

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