Foreclosure.com Scholarship Program Winning Essay 2015, Brian Schears (Runner-up)
Learn from past mistakes, make smart personal choices
by Brian Schears, University of Wisconsin-Madison
Many lessons can be learned by studying and understanding the mistakes from the past. So understanding the reasons for the real estate and mortgage meltdown is helpful to correct future behaviors. However, there is much blame to go around when looking back on the financial collapse of the last decade. Banking and mortgage institutions, governmental factors, laws and lack of oversight, and individuals’ choices, all played a part in creating this disaster. Therefore, it is difficult to ascertain which factor was most responsible. However, one thing I do know and believe in is the power and impact of the individual. So, although I am not a business, economic or political science major, I am knowledgeable of personal financial responsibilities and that the choices individuals make can affect their personal life, and as a nation of people, can affect the economic status of our country. Therefore, I am writing the lessons that were learned from the real estate and mortgage collapse from a more individualistic point of view.
I grew up in a modest, middle class family of six. We had an average house, with an adequate size yard. My parents taught me the “value of a dollar”. They taught me the importance of saving money, living within a budget, and knowing the difference between “needs and wants.” At times it may have seemed cliché and old fashioned, but one thing that resonated with me is to not overspend and to “live within your means”. As a child, I remember going to friends’ houses that were bigger and more elaborate, and I asked my parents why we didn’t have a larger or more extravagant house. My mother responded that my father and she bought a house they could afford, as she did not want to be a “slave to a house payment”. It was also explained to me, that when my parents were considering buying our home, they planned in such a way that if my mother chose not to work and be a stay-at-home mom, that my father’s income alone could cover the mortgage and bills. Like many others in their generation, and past generations, they saved money beforehand and bought their home with a down payment of at least 20 percent. They also considered property taxes when purchasing their house. A bigger house meant a bigger property tax bill.
I feel that many of these financial principals had slipped away from generation to generation. In the recent past, many individuals felt that they were not living the “American Dream” if they did not “own” a house. However, many did not want to wait to save up enough money for a down payment, thus actually “owning” a greater portion of their home. Subprime loans became popular for individuals with poor credit, encouraging people who were not financially ready to purchase a home. Many individuals took the advice of mortgage brokers or other financial advisors claiming that they could afford a particular mortgage payment; however, these advisors were not considering the specifics of the buyers’ personal spending habits, unexpected expenses or what would happen in the event of a job loss. Other real estate buyers feared they would lose out on low mortgage rates if they delayed buying property. Lastly, some individuals wanted to get on the “band wagon” so to speak, and buy property as an investment, expecting the property to quickly appreciate in value, and resell it to make a hefty profit.
Fortunately, many lessons were learned by the housing collapse of the 21st century. The silver lining is that as a nation of independent individuals these valuable lessons can be applied to ensure Americans can once again purchase and own real estate with peace of mind. Most Americans know someone who experienced hardship from this crisis, and can reflect on their own behaviors to become more prudent real estate buyers.
First, Americans learned that buying a home should first and foremost be with the intention of living in the house and not for mere investment. A home can provide shelter, comfort, and a place to live for many years, and in time if it appreciates in value, that is a bonus. This crisis was a wakeup call, that the average person cannot predict the markets, so for the average person, it may not be wise to purchase real estate with the expectation of making a quick profit. Many have learned that the purchase of a house should be for the purpose of creating a home, and in time, if it increases in value, that is an added blessing.
Another valuable lesson that was learned is to stay within one’s budget. It is helpful to get outside advice from financial advisors, but, realize that potential real estate buyers know themselves best. When it comes right down to it, it is the buyer’s responsibility to estimate a realistic and manageable mortgage payment. When estimating an affordable mortgage payment, real estate buyers should consider future expenses and unexpected situations, such as a loss of an income due to having children or loss of a job. Also, it would be beneficial for buyers to avoid stretching their budgets to the point that they cannot sleep at night due to worry, or have money for other comforts of life. Therefore, potential real estate buyers ought to look for houses that are in their price range, and avoid being persuaded to look at houses that are beyond their current budget.
Americans learned to educate themselves in regards to mortgage loans. It is beneficial to understand the different types of loans, and weigh the pros and cons of each. Real estate buyers are more aware that if something looks “too good to be true”, it just may be. Potential buyers have become more informed and are aware that adjustable interest rates may look appealing because they are so low, but they usually do not stay that way. Secondly, many have learned to avoid using their real estate as a source of money or a bank. It is tempting to refinance a mortgage to get available cash for other expenses, such as college tuition or loans, remodeling costs, etc., but refinancing a mortgage to obtain income or cash only adds to the original purchase price of the real estate and increases the monthly mortgage payments.
Americans also learned that homeownership may not be for everyone. There are many advantages to renting and exploring options. Renting alleviates the headaches of house repairs and maintenance, allows for more flexibility to relocate, and allows time for future real estate buyers to save and mature.
Nevertheless, several positive situations resulted from this crisis. First, housing prices dropped and became more attractive. This drop in price of homes opened the market to individuals who could not previously afford a house. Unfortunately, this drop in value of homes hurt property sellers at the time, but, like any market, the housing market needed a time to correct itself and get to more realistic levels. Likewise, even Americans that were not personally involved with the housing market and mortgage meltdown became more aware of the necessity and benefits of saving money. As the economy tanked, and people’s financial situations became more uncertain, many Americans began saving more of their income as to have an adequate “slush fund” for unexpected financial occurrences. Thus, the awareness and importance of saving is another silver lining and lesson learned from the real estate and mortgage collapse.
However, as a nation, Americans can only hope that mortgage companies and government agencies involved, will apply the lessons that came from the collapse. Many mortgage companies have chosen to use more stringent qualifications when offering loans. By tightening up the loan qualifications, lenders can be assured that they are lending to more fiscally responsible individuals. Ensuring adequate credit of their borrowers, and eliminating subprime loans and other risky loans, may prevent future problems. Requiring borrowers to have a reasonable down payment ensures that buyers have more money at stake, and makes it more difficult to walk away from their loans when the going gets tough. Hopefully, governmental agencies and regulators have adjusted the manner in which loans are sold to investors. Americans learned that more governmental oversight is needed in these financial markets to eliminate risks. Yet, these are lessons for government regulators and financial institutions. As individuals, Americans do not have much control of these policies and practices.
So, although the real estate and mortgage meltdown negatively affected our nation as a whole, and individuals personally, many solid and steadfast lessons were learned, rekindled, and are applied today. Understanding the mistakes of the past can teach positive lessons that may enrich the nation’s future, thus exposing the “silver lining”. By heeding these many lessons, the next generation of real estate buyers, as well as the “boomerang buyers,” may understand the importance of assuming more personal responsibility, making sound financial choices, and becoming more astute consumers of the real estate and mortgage markets.
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