The news these days is filled with reports on how the economy is being affected by the meltdown in the mortgage-lending business. What happened? Should Catholics be concerned?
Over the last few decades, a substantial shift has occurred in how the mortgage business works.
It used to be that, when you borrowed money from a lender, the lender actually held onto your mortgage as an investment. He had a stake in knowing that you would repay your loan. More and more, lenders act as middlemen. They originate and service the loan, but they no longer hold it. Instead, your loan is packaged along with many others and sold to investors.
With lenders getting rewarded for originating loans, but no longer being directly invested in the performance of the loans, lending standards have deteriorated. Home-buying loans have been granted with no money down and very creative terms, including interest-only. I’ve even heard the phrase “Ninja loans.” That’s an acronym referring to people with “No Income, No Job.” This bubble couldn’t hold its air forever. We are suffering through the adjustment phase now.
This headline-grabbing situation provides us a good time to review some basics about debt.
Debt is a financial tool that, when properly used, can help you reach some of your financial goals. When misused, it leads to financial bondage. Whenever Scripture speaks of debt, it does so with a cautionary tone. Proverbs 22:7 says, “The borrower is the slave of the lender.” Habakkuk 2:6-7 says, “Woe to him who heaps up what is not his own — for how long? — and loads himself with pledges. Will not your debtors suddenly arise, and those awake who will make you tremble?”
Debt isn’t described as a sin in the Bible, but we are clearly warned about its potential consequences.
How can we discern how best to use debt? Here’s a good rule of thumb. Only borrow when you are buying an appreciating asset. There’s gold in that statement, so let me repeat it: Only borrow when purchasing an appreciating asset. The trick is in knowing when an asset will increase in value.
Over the long term, house prices historically appreciate at a rate a bit higher than inflation. So it can make perfect sense to borrow prudently to buy a home. On the other extreme, you’ve got credit cards. While there is nothing inherently wrong with using a credit card to make regular purchases, it doesn’t make any sense to borrow money using credit cards.
Just ask yourself when you last charged something that appreciated in value. If you use credit cards, make sure you are paying the balance in full every month.
What about cars and home-equity loans? Do cars appreciate in value? Of course not — a new car loses 15% or more of its value the minute you drive it off the dealer’s lot. The same is true for the majority of purchases using home-equity loans.
What we need is a new mindset. Next time you consider borrowing money, ask yourself whether what you are buying is expected to increase in value.
God love you!
Phil Lenahan, author of
7 Steps to Becoming
Financially Free, is online at veritasfinancialministries.com.