J. Peter Nixon September 23, 2008 - 11:58pm
In the spring of 2003, my wife and I were wrestling with whether to move to a larger house. My wife has a large family, and our small house wasn't really up to hosting the epic family holiday events that usually feature 20-30 people at a minimum. At the same time, we were considering Catholic school for the kids--more for religious reasons than academic ones--and we weren't sure we could afford both a new home and Catholic school tuition.We knew a neighborhood where we might be interested in living. We had several friends from the parish that lived there. With California home prices rising so fast, though, it seemed out of reach for us. We talked to the realtor who helped us buy our first home, who encouraged us to meet with a banker. The four of us sat down at the realtor's office and talked options.The banker was very optimistic that we could obtain a loan that would allow us to move into the neighborhood we wanted. "We have all kinds of new products," he told us and proceeded to explain various types of adjustable rate mortgages, "interest only" loans, and other options that I could only vaguely understand. By the end of the meeting, my head was swimming, but I began to feel optimistic that maybe we could afford the "home of our dreams" as the saying goes.In the end, though, we decided that we simply couldn't afford a higher mortgage and Catholic school tuition. A faith-based education for our children was more important to us than a larger home. Six years later, we're still in the same house.In light of recent events, I've taken to wondering what would have happened if Catholic school tuition had not been a consideration. Would we have been tempted to take out a larger loan than we could handle? It could have happened very easily. Looking back over two decades, almost nothing seemed to have stopped the inexorable rise of California real estate values. Betting on rising values seemed like a reasonable risk back then. After all, if the banker lending you the money thinks you can handle it, you should trust him, right? He's the one bearing the risk, right? Back in those days, I had little understanding that most home loans were quickly packaged into securities and sold.I tell this story because I'm getting a bit tired of hearing that the root of the current financial crisis is irresponsible families who borrowed more than they could afford. The truth is that it became very difficult in the early part of this decade to figure out exactly what the "responsible" decision was with respect to a home loan. My wife and I are reasonably well educated and we still had a difficult time running the numbers. What of those families who-rightly or wrongly-placed their faith in what the lender and the realtor were telling them? Expert advice is, after all, why one hires professionals in the first place.I'm not suggesting that there weren't buyers in the market who were driven by speculative greed. There certainly were. I suspect that most of us, though, shared very common American dreams: a first home or a home "just a bit bigger" than the one we had. There may be some sin in that, but I'm not inclined to be lectured about it by newspaper columnists living in Greenwich and Chevy Chase.If there is anything good to come out of this current crisis, I wonder if it might be a re-assessment of the extent to which families are now expected to be experts in financial risk management. From our retirement portfolios to our college savings accounts to our mortgages, families are now expected to perform very sophisticated calculations regarding the likelihood and cost of future events. I suspect I don't speak only for myself when I say that I'm finding the burden of doing this increasingly overwhelming.