Growing up in communist Romania during the Cold War was not easy. Life was tough for my family and for most Romanians. But little did I know that growing up there would instill valuable life lessons. Freedom was scarce, food was scarce and credit was virtually non-existent. My parents never had a credit card and owning a home was exclusively for the rich elite. Of course, a socialist society is not supposed to have rich people. However, we all know by now that socialism and communism exist only in the land of Utopia.
Our president was always vocal about how all the Romanian people owned everything in the country. But if my parents wanted their share, they had to be prepared with lots of cash. So they never owned an apartment in which we grew up because they were not able to save enough money to pay for it. Now, don’t get me wrong, they were still paying rent, utilities, etc. And they were never given a grace period, so if the rent was not paid by the due date, we would be out in the street. If the utilities were not paid on time, we would have no electricity or heat, and that would not have been pleasant during the harsh winters.
In 1983, God brought me to the beautiful United States of America, the land of opportunities. I soon realized that to live in a decent manner, you didn’t have to be prepared with lots of cash — credit was the king. Within years, I established plenty of credit, but the most valuable lesson from childhood stayed with me — “don’t buy it unless you can pay for it with cash.” Homes are excluded because they come with a much higher price tag.
Destiny sent me in a direction that I never would have expected when I was growing up. I wanted to be a flight attendant, but I ended up with a career in mortgage banking. As a child, my mom would never allow me to go to sleep at night if my homework was not done. I discovered that math was not that hard and in actuality, if I paid enough attention, I would even feel attracted to the complexity of math figures. It has been 16 years since I have been dealing with people’s credit and finances and about 10 years of counseling with all my customers.
Back when I started my career in the mortgage business, the concept of subprime or non-conforming was very new. The majority of mortgage loans were made primarily to those who had great credit, job stability, enough down payment and low debt-to-income ratios. The desire for home ownership grew rapidly, and many lenders realized that there was an untapped market out there, the consumer with less-than-perfect credit. Among the first non-conforming mortgage loans required a large down payment, a minimum of 25 percent to 30 percent of the purchase price. It was a win-win situation. You had to be out of your mind to let your home go into foreclosure if you had to put $40,000 or more of your hard-earned money in it.
Soon our country discovered that many folks don’t have that kind of money to invest in a home and the “right” to home ownership was not there for everyone. Call me old-fashioned, but I still believe that it is more of a privilege rather than a right to own a home.
With pressure from the feds to extend credit to all people, including the low-income ones, the lenders had to become creative with their mortgage loan programs and Wall Street had become even more profitable.
But I wouldn’t be quick in judging Wall Street so fast. After all, many of the average Jane’s and John’s retirement accounts were investing in mutual funds that were investing in mortgage-backed securities. And for a long time, it worked.
It worked because the subprime loans came with a higher rate to the marginal borrower and a higher profitability to Jane and John’s retirement account. But the sky was not the limit in opportunities and the time came when we all, as a nation, paid the price.
We are still paying for it and we’re still looking for the light at the end of the tunnel. The subprime crisis is here. I don’t believe that there is one particular group that needs to be blamed for this turmoil but being involved in the subprime lending field as a mortgage originator and counselor, I knew that those subprime loans were not meant to be permanent mortgages for anyone.
The concept of making a 100 percent mortgage loan to credit marginal consumer is still unrealistic in Europe, but we Americans have always tried to be more innovative and also more willing to assume higher risks. Subprime loans came with a higher price in rates and terms due to the risk involved. The idea was to allow more people the chance for home ownership, especially the ones with a blemished credit history.
I called them “transient loans” simply because they were supposed to be temporary in nature. I explained this thoroughly to all my customers so they could fully understand what they needed to do after they moved into their brand new home.
The two-year adjustable rate mortgage came with a much lower interest rate than the fixed rate mortgage. As a result, many people were able to qualify for a mortgage in an escalating real estate market. My customers knew well that they had two years to get their credit to the level where they would qualify for a conforming low interest rate mortgage. And guess what they all did and why I am so proud of them? They lived on a budget and made their payments on all their loans on time. They made some sacrifices and they believe it was worth it.
My customers are just a small percentage of the people who were given a chance for home ownership and they have managed to keep their homes without going into foreclosure. I have always believed that education would be a major factor in our lives and that is why I educated my customers. And it is the lack of education that highly contributed to the subprime turmoil.
An educated individual would not allow himself to be taken advantage of by a predatory lender. An educated individual would know exactly what the terms of the loan, the APR, the length and whether it’s a fixed or an adjustable rate mortgage. And we don’t need a Ph.D. in finance to learn all this, just the desire and willingness to learn more so that we better ourselves.
There is light at the end of the tunnel and we will be able to get out of the tunnel sooner if we only did our part. For now, we just have to accept the fact that lenders are tightening up their lending guidelines and it is going to be more difficult to get approved for a mortgage. Wall Street and the lending industry will become more conservative and the dream of owning a home for many would just have to be put on hold.
But patience is a virtue. So let’s not lose faith and let’s work diligently toward becoming more aware of the responsible use of credit. Then and only then we can say that we did our part in fixing the problem. An educated society will diminish and possibly eliminate our economic and social ills that greatly affect us today.
Carmen Alexe is the founder of Credit Smart Academy and she provides seminars on credit and debt management, budgeting, saving and investing money. She can be reached at 826-6263 or calexe@comcast.net.
