What Role Did Borrowers Play in the Housing Crisis?

There’s been a lot of finger pointing when it comes to figuring out who is to blame for the mortgage meltdown. Many homeowners don’t know whom to blame, except to say they had little or no part in the debacle. The truth is, numerous parties had key roles in the collapse of the real estate industry. Borrowers are among them.

That’s not to say that homeowners were the sole cause. Many borrowers were truly misled and placed into dangerous loans. Others had a feeling that things were too good to be true.

It was a great time for new homeowners in 2005: mortgage brokers competed aggressively to offer the most attractive loans, barriers like sizable down payments didn’t seem to matter any more and housing values were only going up. The sooner you became an owner, the sooner you could start enjoying the benefits of rising property values. Those escalating prices led to low-interest home equity loans that many used to pay for remodeling, college tuition, vacations and new vehicles.

Many of us took advantage of looser lending standards. We overextended ourselves without really understanding the consequences. Now, about one out of eight homeowners are behind on their mortgage payments. There are solutions. The first step is to learn from past mistakes.

Sustainable Income is What Really Matters

At the height of the housing boom, words like “flexible” and “easy” were associated with mortgage loans. If adjustable rate mortgages became unaffordable, we’d simply refinance. Now that those effortless options aren’t available, one fact is clear: mortgages are legally binding contracts. They’re a serious obligation. The monthly payment must be made on time, regardless of difficult circumstances.

The best financial decisions are based on sustainable income. When the economy is strong, many borrowers include commissions, bonuses, profit sharing and overtime when totaling their income. Small business owners often count on revenue earned when business is thriving, but all this income can disappear when the economy slows.

When analyzing a mortgage payment, only depend on sustainable income. Don’t get carried away by what you earned in a good month or a good year. While no income is 100 percent secure, it’s best to count on only the income you and your family can depend upon during difficult times.

What If …

Americans are optimists. Worry is sometimes seen as weakness, but a best case scenario leaves absolutely no room for things to go wrong, as they often do. When analyzing a mortgage, ask yourself “What if my spouse loses his or her job? What if we face a family emergency? What if my house or car needs major repairs?” Your financial plan should leave room for setbacks.

Read the Fine Print

We know that mortgages and mortgage documents are complicated. They’re written by lawyers and can be hard to decode. People should never sign something they don’t understand.

Many borrowers say they didn’t know their mortgage payment could adjust or how the adjustment worked. Those facts were in your loan documents and the promissory note that you signed. Before you sign, understand. Ask questions. Don’t be afraid to “look dumb.” Don’t be worried about losing the deal. Never rush.

There is a Brighter Day

Many homeowners are facing debt and regret. A nagging little voice told us that the two-bedroom house down the street wasn’t really worth half a million dollars, but we bought into the delusion. As a consequence, many of us have seen our credit scores suffer and we’ve put a lot of stress on ourselves and our families.

If you’re in this situation, you’re not alone. With so many homeowners in trouble, lenders are working with government agencies with unprecedented cooperation and urgency. Help is available through the Obama Affordability Plan, as well as from state governments and lenders.

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