Published: January 26, 2008 11:41 pm      

Bad Advice

Once a farmer told his neighbor that his best had the colic. His neighbor volunteered that when his mule had colic, he gave him a quart of whiskey. “Really?” the farmer asked. “Yep.”

A few days later the farmer saw his neighbor again and said in a huff, “I gave my mule a quart of whiskey like you said and he keeled over and died on the spot.”

“Hmm…” his neighbor mused, “mine too.”

Bad advice comes easy. And it’s obvious looking at the current home mortgage crisis that plenty of it’s been going around. Just like the neighbor/large animal vet, I routinely hear would-be experts offering lousy financial advice.

Over the past decade, millions of Americans have used historically low interest rates to get over their heads in debt buying houses, cars, and toys they couldn’t afford. Rather than looking at overall costs or value, a generation of consumers grew up focusing only on whether they can make the monthly payment. An entire mortgage industry popped up to cater to America’s increasingly extravagant housing tastes.

Young couples who should buy modest homes with conventional, fixed rate mortgages are often encouraged to get into bigger houses by using adjustable mortgages with teaser rates (that go up later) or interest only loans that initially require you to pay absolutely nothing toward the principal.

Last year a colleague of mine told me that he could only afford a $200,000 fixed rate conventional mortgage, but after his realtor (who was trying to sell him a bigger house) showed him how low his payments would be with an interest only loan, he and his wife decided to upgrade. “Besides,” he said, “the realtor told us that home prices are going up so fast in that area that if we ever get in trouble, we can still sell it for a profit.”

Some realtors and bankers like the ones advising my colleague give bad advice because they stand to gain higher commissions and more interest when consumers do as they suggest. Unfortunately, home buyers are prone to listen to supposed experts when they like what they’re hearing. But more house with lower monthly payments sounds too good to be true because it is.

As if Americans weren’t already in enough debt, banks don’t stop with just one mortgage. They happily offer a second or third to make sure than any equity you may have built is converted back into another loan to pay even more interest on.

Multiply that scenario a few million times and you have a huge financial crisis. When people bet their financial future on the hopes that a house they cannot afford will go up in value fast enough to bail them out of their self-induced predicament, they’re risking far more than they stand to gain.

Both the borrower and the lender are to blame when loans like these go into foreclosure, and both should bear the costs rather than expecting the rest of us to bail them out with our tax dollars. The buyer should beware and the lender should be warned that Uncle Sam isn’t going to be there to pick up the tab if he makes bad loans.

Like every other market in history, the mortgage market will eventually correct itself. And American consumers will gradually learn what previous generations instinctively knew: Live within your means and don’t take financial advice from people who are eyeing your wallet.



Craig Ziemba is a military pilot who lives in Meridian. A book of his columns entitled, Give War a Chance is available at Meridian Bible Bookstores.