Sometimes the middle classes have a hell of a lot more financial horse-sense
than the rich, even if the financial press doesn’t like to spin it that way.
Exhibit B: Richard Campbell, asking
a question of MarketWatch’s Lew Sichelman.
Mr Campbell is in contract to buy a vacation home. "Both I and my wife
work white-collar managerial jobs in New York, so we have more than enough to
buy the place outright," he says. They just don’t want to do that: in fact,
what they want is to take out a 90% mortgage. The problem is, a 90% mortgage
costs more than an 80% mortgage. Life’s so unfair, sometimes. Mr Campbell and
his wife have more than enough money: shouldn’t they be able to get a 90% mortgage
at the same interest rate as an 80% mortgage?
"Your remarks make perfect sense," replies Mr Sichelman, "but
nobody ever said this is a perfect world."
In fact, Mr Campbell’s remarks make very little sense.
For one thing, Mr Campbell and his wife are managers, they’re not professional
investors. Stocks are near their all-time highs, there’s a bubble in the credit
market, and house prices are falling. Yet they’re seemingly convinced that they
can get a higher return on their money than the 8% or whatever it is that they’re
going to pay on their mortgage. In other words, they think they’re smarter than
the bank who’s lending to them. "Ha!" they seem to be saying, "You
poor saps are willing to lend to us at 8%, but we are smarter than you, and
will take that money and invest it and make double-digit returns!"
In fact, Mr and Mrs Campbell are not smarter than the bank who’s lending to
them, and there’s a very good chance that their investments will return less
than the amount of interest they’re paying on their mortgage. In which case
they would have been better off simply buying their vacation home for cash.
Secondly, Mr Campbell seems convinced that People Like Him simply don’t default:
Isn’t it odd that in our advanced world of actuarial analysis, no one breaks
down those numbers to find that those low-down-payment defaulters also have
lousy credit, don’t have a job, are younger than 25 or whatever.
It’s not the low down-payment which causes default, he’s saying, it’s lousy
credit or young borrowers or other things which distinguish him from the great
unwashed. Actually, the things which cause default are the kind of things which
really do happen to the likes of Mr and Mrs Campbell: layoffs, unexpected medical
bills, death, divorce, lawsuits. Our rich friends are not nearly the perfect
credit risk they think they are.
What’s more, Mr Campbell is exactly the self-regarding type who is likely to
simply walk away from his vacation home if he finds himself in financial difficulties,
leaving his lender holding the bag. After all, if he puts little if any money
down, then it’s easy come, easy go. If the home goes up in value he’s made lots
of money; if it goes down in value, he can stick it to the bank. (A Wall Street
type once advised
me to do exactly that.)
Finally, Mr Campbell has an obvious solution to his problem staring him in
the face, and can’t see it. He wants to put just 10% down, not 20%, but he doesn’t
want to pay the interest rate on a 90% mortgage. Fine. All he needs to do is
put 20% down, get an 80% mortgage, and get half of the 20% downpayment by borrowing
it from his broker. Given the size of his assets, his broker will be more than
happy to loan him the money, especially if he uses his stock portfolio as collateral.
Who’s better with their money, then? The debt-swamped
middle classes, or the second-home-owning rich? Clearly, I think, the former.