Adventures in Personal Finance, Part 2: The Rich Couple

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.

(Via)