Our Take On The Mortgage Crisis
Last week, House Democrats defied the Bush administration's veto threat and rammed through H.R. 6, energy legislation that would change fuel economy requirements for cars and light vehicles over a 13 year period.
Among the arguments raised by the White House and Senate Republicans was that the bill legislated a free market economy.
We thought that was an interesting excuse then because the U.S. does not have a free market economy, despite any political rhetoric to the contrary. Yet the subprime mortgage issue apparently required federal government intervention in those very same markets, which leaves us with a single question.
Why?
Overextended consumers in danger of losing their homes is a terrible plight. Equally terrible are the tens of thousands of innocent consumers now on unemployment in time for the holidays because they worked for large financial institutions who gave credit to greedy consumers.
Yes, greedy consumers. "But I didn't know (or think) the rate would change that much," is the most common rallying cry. We're sure that is true because our discussions with consumers show that most don't spend long enough during their mortgage closing process to actually read, much less understand, the documents on what is typically the largest purchase of their life.
We listened to these same consumers crow about their low, low rates while stodgy conservative consumers clung to 30 year fixed mortgages and vowed to reduce their overall interest expense by voluntary rather than mandatory pre-payment as in the accelerated 15 year mortgages. We likewise saw many consumers opt for interest-only notes. Many of those consumers now have no equity left in their homes, which financial planners tell us often funds a major portion of a person's retirement nest egg.
Any financial institution who did not fully disclose the maximum interest rates and payment schedules should face civil, and as necessary, criminal penalties at an individual level. But consumers who just guessed wrong and traded 36 lower payments until a rate reset don't deserve and shouldn't receive federal intervention. No matter what assurances government officials make, the market is too symbiotic for these measures not to impact the overall consumer mortgage market.
Bad financial planning by greedy consumers shouldn't be protected at the expense of fiscally prudent consumers who did their homework and chose not to speculate with their home. For consumers who were told the odds and gambled (much like a lottery or slot machine) with their home, we have sympathy, but a bailout is the wrong message to send to our financial trading partners throughout the world, to our independent businesses and to our younger consumers who have now learned that engaging in the latest financial fad may not have repercussions.
Reinforcing that lesson may be the biggest problem this debacle caused.
Monday, December 10, 2007
Tuesday, September 04, 2007
New Month, Same Housing Woes
After July's foreclosure rate surged 9% from June to July and almost doubled between July 2006 and July 2007, many expected August's market gyrations would follow. The Federal Reserve Bank eased the situation somewhat by attempting to control liquidity.
Now Congress is getting involved.
Senator Chuck Schumer (D-NY) has told lending giant, Countrywide Financial, to stop compensating brokers more for adjustable mortgages. Schumer said at a press conference that 40% of borrowers in an adjustable rate mortgage could have qualified for conventional financing.
As usual when politics and consumers mix, the results are framed by the different perspectives. Consumers took adjustable rate mortgages to lower their payments or qualify for homes they couldn't afford. The mortgage industry did not take advantage of the consumer. The consumer has taken advantage of a loophole that provided a year or three of monthly cash flow. Now with higher rates, those consumers who cannot afford their homes are going to have to take action. They will need to move or take second jobs or higher paying positions that involve other sacrifices.
Foreclosure should be the last possible resort. Banks and lenders did not cause the subprime crisis. Consumers did. While late night comedians joke about anyone qualifying for a mortgage, the same consumer truths were applicable in that market.
1) Understand the terms.
2) Don't overextend yourself if the worst case scenario you agreed to occurs.
Perhaps the second car has to be sold. Perhaps one of the children can't go to college this year or can only go part-time. By behaving as though a low rate mortgage is a right rather than a privilege earned by strong credit ratings, consumers who wanted it all are driving a financial crisis impacting those who had it all.
Consumer Help Web always reminds consumers to know their rights. Knowing their responsibilities is just as important.
After July's foreclosure rate surged 9% from June to July and almost doubled between July 2006 and July 2007, many expected August's market gyrations would follow. The Federal Reserve Bank eased the situation somewhat by attempting to control liquidity.
Now Congress is getting involved.
Senator Chuck Schumer (D-NY) has told lending giant, Countrywide Financial, to stop compensating brokers more for adjustable mortgages. Schumer said at a press conference that 40% of borrowers in an adjustable rate mortgage could have qualified for conventional financing.
As usual when politics and consumers mix, the results are framed by the different perspectives. Consumers took adjustable rate mortgages to lower their payments or qualify for homes they couldn't afford. The mortgage industry did not take advantage of the consumer. The consumer has taken advantage of a loophole that provided a year or three of monthly cash flow. Now with higher rates, those consumers who cannot afford their homes are going to have to take action. They will need to move or take second jobs or higher paying positions that involve other sacrifices.
Foreclosure should be the last possible resort. Banks and lenders did not cause the subprime crisis. Consumers did. While late night comedians joke about anyone qualifying for a mortgage, the same consumer truths were applicable in that market.
1) Understand the terms.
2) Don't overextend yourself if the worst case scenario you agreed to occurs.
Perhaps the second car has to be sold. Perhaps one of the children can't go to college this year or can only go part-time. By behaving as though a low rate mortgage is a right rather than a privilege earned by strong credit ratings, consumers who wanted it all are driving a financial crisis impacting those who had it all.
Consumer Help Web always reminds consumers to know their rights. Knowing their responsibilities is just as important.
Labels: Countrywide, financial, mortgage, sub-prime
