Most blame for today's housing market is rightly assigned to lenders. It's true, their low standards and poor qualification practices contributed mightily to where we are today. Yes, they could not have lowered standards on government secured loans without political complicity but lobbyists worked hard to create a wider market for lending. Further, there were unscrupulous firms offering loan products that made no sense. Recently I read a homeowners deed of trust several times attempting to understand their Option Arm mortgage. I gave up and cursed the mess we're in today.
But, being the thoughtful and curious type, I keep coming back to questions. Why, if they couldn't understand what they were being asked to commit to, did so many buyers sign these documents? How did so many homeowners go so quickly from closing date to foreclosure date?
It's complicated but a piece of it was the loan qualification process. Part of the problem is buyers equating "afford" and "qualify" as one and the same. Au Contraire! For many buyers, what they could "afford" was very different from what they could "qualify" to borrow
Buyers who understood what they could "afford" understood their take-home pay - what they needed for food, medical expense, clothing, entertainment and incidental expenses. Those buyers also understood they didn't want to live for a house to the exclusion of all else. Yet, they often struggled to stick to budgets because it meant choosing less home and fewer features after their mortgage lender "qualified" them to buy more house. If they made it past the temptations, they bought what they could "afford" rather than what they could "qualify" to borrow.
Buyers who read "qualified" as "affordable" overbought and found themselves overextended at first crisis. Unfortunately, it's a sad fact that many homeowners who bought what they could truly "afford" also found themselves equally compromised when the bottom fell out and their jobs disappeared.
But, it's still true that we should all understand our personal circumstances and how much money we can "afford" to budget for housing. That is called "living within your means" - one of the dictionary definitions of "Affordable."
Modern economic culture seems designed to siphon away a significant portion of family income a few dollars at a time and understanding what's affordable is harder than ever to do. Revised lending standards geared to modern living can help but a buyer's understanding of "affordability" is one key to future housing stability.