The Anatomy of the Housing Crisis

I have the opportunity to stand before leaders all over the world and talk about what God’s word says about money. One of the most potent topics that always creates lively discussion is debt.

While never calling debt sin, God does puts some boundaries in place. Our discussion usually centers around these three:

1. Don’t Presume upon the Future
2. Have Collateral You Can Afford to Lose (with more value than the loan)
3. Be Committed to Pay It Back

Lately I’ve been fielding a lot of questions about what role the abuse of debt played in the US housing crisis. It’s interesting how each of these were mismanaged and broken in the years leading up to the housing crisis.

Don’t Presume upon the Future

None of us can guarantee our next breath, let alone the long-term plans we’ve made. When we go into debt, we should have a clear plan for taking care of it in the event of our death, or illness. We should not make present day commitments based only on future revenue.

Home buyers violated this principle in mass in my country. They were told that although their payments were a stretch for them now, in a couple years their salaries would increase to the point where they would be more comfortable.

Except that didn’t happen.

Many of them lost their jobs or saw a decrease in wages and working hours.

Another way Americans violated this principle was through Adjustable Rate Mortgages (ARM’s) and balloon mortgages. In these loans people start making payments at an affordable amount, only to see their payments go up (i.e. adjust or balloon) over time. They believe they will be able to adjust to the increase because of future salary increases that they presume will happen.

No pay increase or the loss of a job (many times couples are totally dependent on both salaries, making them twice as vulnerable to one of them being affected) renders them unable to pay.

Have Collateral You Can Afford to Lose (with more value than the debt)

Every debt should have an escape hatch built into it. Then, if for some reason you are not able to pay, you can get out! This can be accomplished through insurance and other means, but the most common is through collateral. Collateral is something that stands as security for the debt. It must have more value than your debt, and it works best when the lender agrees to take the collateral instead of the money (or something else) when you make the loan arrangement. You must make sure you can afford to lose whatever you have chosen as collateral. Otherwise, as the wise king Solomon once said, they might come and snatch your bed out from under you!

This principle was also grossly violated. In the housing crisis, what people did have was collateral – their homes. What they did not have was enough of a down payment to avoid owing more than their house was worth. Presuming on the future, they thought that they would gain a down payment in a short time, through the increase in the prices of houses. After all, the forecasters were predicting additional huge gains in the value of homes.

Because they had paid little or no money down, when the value of housing dropped they owed more than their house was worth. They had more debt than they had collateral. They had nothing to trade against their debt. And that violates a timeless principle.

Be Committed to Pay it Back

The Bible says “the wicked borrow but do not repay, but the righteous give generously.” It also says, “Owe no man anything…” Jesus was known for saying, “let your yes be yes; and your no, no.” When we take on a loan we should resolve in our hearts to pay back what we promised.

Because of the crisis and the decrease in home values, many people just decided to walk away from their homes and not pay back their commitments.

Of course there are many other factors, but these three principles will stand the test of time. I’ve been teaching them long before the crisis, I’m teaching them now (although now to more receptive ears), and I’ll teach them when we are back in times of prosperity.

Commit to honor these principles and you will honor the Creator who set them in motion.