Tuesday, June 1, 2010

Wrong Side of the Dice

(Personal note: given that I'm a self-professed conservative, I would have never though that I would rely so much on the New York Times, since it is generally recognized as having liberal leanings. But one can't deny the quality of the writing nor the timeliness of the topics there.)

There are oodles of documented cases where, during the years when the housing market was flying off of the handle, many parties took advantage of the situation to assume more risk than they should have.

- Financial institutions created new and "interesting" (better than some words I could use) ways to loan money to people who could not understand how they were getting in over their heads.

- People who really shouldn't be allowed to borrow money used "no income verification" package to by a house using a mortgage they couldn't afford.

- People who thought they could make a quick buck flipping a house by slapping a fresh coat or paint on the interior and exterior.

I've purchased a few properties over the years. I always stuck to my guns and would only pull the trigger if I knew I could make the payments under the most conservative of circumstances. This meant that I got a 15-year, fixed rate mortgage, with a minimum down payment of 20% giving me a target to hit in terms of my income requirements.

That doesn't mean I wasn't offered some interesting ways of getting a mortgage. The best story in this regard occurred when I was doing some "homework" to determine monthly payments; interest rates; etc. and told the mortgage broker what my upper limit was in terms of a monthly payment. Since it was a specific property that triggered this investigation, I mentioned my concern about being able to put down 20% to avoid mortgage insurance. His response was that I could get a piggyback loan (basically a smaller loan based on the equity in the house that would be generated by my down payment) that would then be used to get me to the 20% mark.

"What would my monthly payment be in this instance?" I asked. He responded that it would be $300 over my limit.

Hello? It was 5 minutes ago that I told you it was a hard limit, and now you're suggesting that I ignore it blatantly?

I have similar stories from previous discussions and/or purchases. The point that I'm trying to make is that while I agree that it isn't solely the fault of the financial institutions that the housing market is in such a mess, they aren't even close to being the minority when it comes to assigning blame.

This morning, in the NY Times, there is an article about people that simply decided to stop making their mortgage payments. Their reasoning is that they can't afford to pay all of their bills due to the crappy economic conditions we have all experienced in the past 2 years, so they would rather pay the electric bill (which can get shut off rather quickly if they don't) and not pay the mortgage (which could take nearly 2 years to complete the foreclosure process).

It's a matter of survival, in other words.

In some instances, the people tried to work with the banks to modify the mortgages but the banks would have nothing to do with the concept. Now that the people are no longer paying the mortgage, however, the banks are crying foul.

"From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are 'milking the process,' said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry."

Oh please. How is anyone going to sell a house worth 50% of the mortgage, requiring the bank's approval, when the bank has already demonstrated an unwillingness to modify the mortgage for the people currently occupying it? This isn't "milking the process" by any means.

One thing my father taught me growing up is to take responsibility for my actions. As he would put it, "you made your bed; now you sleep in it." The banks need to own up for their actions since frequently they are the cause for the situations their borrowers now face. When discussing why their house is worth so much less now a couple pointed out that they refinanced at the height of the market.

"It was a stupid move by their lender, according to Mr. Pemberton. 'They went outside their own guidelines on debt to income,' he said. 'And when they did, they put themselves in jeopardy.'"

How is this "milking the process?" If the banks had not approved loans that were clearly at a high risk of default then they wouldn't be in this mess in the first place. Here's a hint to the financial institutions that lend money:

risk /rɪsk/ –noun

1. exposure to the chance of injury or loss; a hazard or dangerous chance: It's not worth the risk.

2. Insurance .
a. the hazard or chance of loss.
b. the degree of probability of such loss.
c. the amount that the insurance company may lose.
d. a person or thing with reference to the hazard involved in insuring him, her, or it.
e. the type of loss, as life, fire, marine disaster, or earthquake, against which an insurance policy is drawn.

"High risk" means you have a larger chance of losing your investment. So when you made these high risk loans and ended up on the wrong side of the dice you shouldn't start whining about it.

See you next week.


  1. I saw this article, too, Larry, but I had the opposite reaction. I was furious with the borrowers for not accepting personal responsibility. Which is funny, because usually I have more liberal leanings.

    Yes, it was a stupid move by Mr. Pemberton's lenders, but it was also stupid of Mr. Pemberton. I, too, remember being told about risky loans when we started house-hunting 8-10 years ago. One realtor told us that many people were getting loans where the payment would increase over time since your income would only increase. I was flabbergasted. In my view, borrowers who took out loans they couldn't afford or gambled with ARMs should be responsible for the consequences.

    I feel badly for people who tried to do the right thing and are facing foreclosure anyway (lost job, medical bills, etc.). But the people in that article are just a little too gleeful over their free boarding. The banks should have worked with them to begin with, but it doesn't give the borrowers the right to shirk their financial duty.

    Interesting post - a great topic for debate!

  2. I agree with you that what you were told seems too good to be true. But I count you as a numbers-savvy person (I know Michelle personally for those of you keeping score at home) so it's not surprising that you didn't buy the message.

    Consider, though, those who are older. Life skills back then didn't require the type of knowledge needed to successfully navigate these treacherous waters. A similar claim could be made of those who aren't as well educated in financial matters.

    If everyone were like you then I would wholeheartedly agree with your statement. But since I know many people with college degrees who couldn't calculate their way out of a telephone booth, I can't help but think that they were taken advantage of by the banks and mortgage brokers that are "less than scrupulous."

  3. Actually, I would expect those who are older to know better, as they have experienced economic downturns in their lifetime. One couple in the article owned a business, so I expect they should be sufficiently versed in financial matters. And they decided to use their mortgage payments on their airboat and the casino, so you'll have to forgive me if I don't feel very sorry for them. The last guy mentioned owned two rental properties and decided he just didn't want to pay for another year, so I feel the same about him.

    If the banks flat out lied to them about their terms (and they may very well have), then I might feel a little compassion. But I think many people didn't put enough thought into what they were doing. I don't want to encourage that.

    I agree that many people probably need a better financial education. I think we should start requiring this in schools since many kids' parents probably aren't capable of teaching them the skills they need, as this fiasco seems to indicate. (See, there's the liberal in me coming out!)

  4. You raise some interesting points, Michelle, and I'll definitely agree that some sort of "financial education" component is required in our education system.