Is there any such thing as financial common sense?

March 21, 2009

It’s interesting to see just where people draw the line the line on what makes financial common sense.  A NYTimes feature names this group of people the latest victims of the credit crisis – prospective buyers who are loosing their deposits to builders because they can no longer secure mortgages. The sums involved are not trivial.  The cases featured gravitate around the 100,000 dollar mark.

In the video segment Jill Sloane, a broker for one of the featured buyers is uncompromising on the injustice of the situation: “There are people like me and Louis who pay our bills on time, who don’t over-extend or over-leverage ourself, which unfortunately are being affected by the people who should never have gotten mortgages. You know someone who made 50,000 dollars should never have been given a 0% down, 600,000 dollar mortgage on a two bedroom family house in Queens. It didn’t make sense. That’s why we have this problem.”

Let’s examine the details. To get the deposit he lost, her client, Louis Andriopoulis took a loan on his current home which, since he’s not moving, will effectively increase his monthly payments by 1,000 dollars for the next 12 years.  Having used credit to scrape together the 10%, he like many other are are already stretched so tightly that they are unable to come up with the additional 10% that the mortgage industry is now requiring, having re-instated the era of a standard 20% (or more) down.

This is how deposits, which have been paid to the builders (not the banks) in order to reserve the properties, are being lost.

At many levels inventive financing under relaxed standards has not been reserved to the good people in Queens, and they aren’t the only ones who are being hit as a consequence.  What the crisis shows, is that as creativity inducing credit conditions change, many financial decisions that seemed good at the time – including the idea of handing over funds to reserve an unfinished property in advance – are ceasing to be viable, are ceasing to make any sense.  Some situations, like the ones in Queens simply made that turn more quickly than others…

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