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I remember being alarmed last year to learn about the number of people using negative amortization to finance their homes. In some areas it was over half of all home loans and the highest rates of negative amortization loans were nearly 2/3. Negative amortization comes in the form of an Adjustable Rate Mortgage (ARM) where the payments during the first years, before the rate is fixed, do not even cover the full interest on the loan so that after the three or five years when the rate gets fixed, the payments balloon and you owe more on the house than when you bought it. The bet for the borrower is that the house will appreciate more than the loan so that you can refinance.
At the time I thought of how that was a sad way to get in to more house than you could actually afford. Today I found an article on foreclosures in the New York Times. The cause of these foreclosures is not necessarily negatively amortized loans, but it is because of sub-prime lending and a combination of careless borrowers and greedy/predatory lenders. Lest anyone think I am heartless, I think that the bulk of the blame – especially in the cases covered in this article – lies with the lenders.
I could rant about how disgusted I am about lenders who would capitalize on those who are least knowledgeable and least able to protect themselves or afford the losses that they face. Instead I would like to point to the root cause of this plague. It is greed – the love of money.
When I purchased my home I dealt with a mortgage broker who had my needs and values central to his decision making process. When I estimated what I could afford in monthly payments he cautioned me against estimating too generously. After pre-approving me for a certain level of mortgage he suggested that it might be to my benefit not to try to find the most house I could fit under the limit. The end result was that my payments are lower than I thought I could afford. I pay what I estimated that I could afford and I am paying off the house faster because of it. This is not the attitude displayed by the broker who would exaggerate your income to look larger to get you into a larger loan so that he can get a larger commission.
It’s too bad that we have so many people (not just in the real-estate business) who claim to provide a service but who only service their own pocketbook. The fact is that the broker has nothing to lose if you default on the loan. Generally speaking, the lender can recoup their costs between the payments you make and the money they get from the foreclosed property. The loss is almost entirely the borrowers loss, and in the case of most of these loans, the borrower does not know enough to protect themselves when dealing with greedy and knowledgeable brokers.
8 replies on “All for the Love of Money”
Lenders who prey on the ignorant, using their persuasive influence to convince buyers to stretch beyond their means in order to collect at their clients’ expense are worthy of reproach. Of that there can be no question. Realtors are also involved, at times, in pressuring their buyers to go bigger – the realtor is the one in the equation that has nothing to lose, as they put no money on the line in the deal.
Yet, as with most things, the bulk of the responsibility lies with the consumer. No matter what advice they get from lenders or realtors, they are the ones that sign on the dotted line. The banks explain what’s on the line if they don’t pay as promised. The individual is the one that knows his own finances, spending habits, etc., that will help him to make a good decision. When a decision is made to buy beyond his means, it is his problem – not the bank’s, not the realtor’s.
The Lord, as recorded in Luke 14:28 asked, “for which of you intending to build a tower sitteth not down first and counteth the cost, whether he have sufficient to finish it?” It’s our own job to “count the cost”. We need to take total responsibility for our own decisions, regardless of any role anyone else plays.
The scriptures teach us that men are “free forever . . . ; to act for themselves and not to be acted upon” (2 Ne. 2:26). When we excuse individual behavior and place blame on someone else, we are in effect suggesting that they have not the freedom to act, but that they are simply pawns, being acted upon by others.
It’s important to remember that the only reason banks and other lending institutions are able to exist is because they make a profit at it. If there was no profit, nobody would do it (would you do your job if nobody was willing to pay you for it?). If there was no profit, there would be no incentive to engage in the business of lending. If there’s nobody willing to front the money for you and me to buy homes, we could not afford to buy a home at all, unless we penny pinched our entire lives to pay cash for a home.
It is also helpful to recall that mortgage lenders, as with other capitalist ventures, provide for their clients only that for which clients are willing to pay. McDonalds provides greasy, unhealthy food – not because they’re evil, but because people are willing to buy. If buyers stop coming around, they’ll have to change their menu to stay in business. Likewise, if home buyers are wise and choose solid, safe mortgage products, such as fixed rate loans for homes they can afford to buy, then sub-prime and negative amortizations will become extinct. The market pressure for such change will only come from the consumer, as well it should.
In none of this am I excusing those who, for greed and money, take advantage of unwary individuals. To excuse those who promote, say, pornography because “that’s what people want to buy”, is not my intention – these people are despicable and are without excuse. But they’ll go away and stop, if consumers stop buying. The responsibility and the power lie with all of us. Let’s stop blaming the conspicuous few and start taking it upon ourselves to change things for the better.
I agree that consumers are responsible for their actions, but what about the decisions they have made based on false or misleading information. Not everyone reads the fine print of their contracts, and even those who do may not always understand the fine print. Sometimes they may miss things, not because they are foolish or hasty, but because there is so much there that something gets overlooked.
So while I do not intend to justify the foolish, I do think that we should do what we can to protect people from those who would be predatory. Those who know what is going on but who neglect to help their clients to understand the hidden costs of the deal.
Though we may say that men are free to chose for themselves, we must admit that there are times when they have not been given the information necessary to be truly free and fully culpable for their decisions. I think we can fairly suggest that their are situations where people are no more than pawns being acted upon – that is why we have so many laws protecting children in so many aspects of life. We should not fall prey to the fallacy that just because a person is of legal age they are sufficiently informed to act responsibly in all matters that they may face. Sometimes people just get in over their heads – especially in complex matters such as these.
David: “Not everyone reads the fine print of their contracts, and even those who do may not always understand the fine print.”
Jason: Your responsibility is to read the fine print. If you don’t understand, ask. If you don’t trust the lender to tell you the truth, find someone else you trust and ask them.
David: “Sometimes they may miss things, not because they are foolish or hasty, but because there is so much there that something gets overlooked.”
Jason: We’re talking about buying a house here, not buying a happy meal. People ought to know that it’s worth the time and effort to figure it out. Most of the time, I think people (myself included) are foolish or hasty.
David: “We should not fall prey to the fallacy that just because a person is of legal age they are sufficiently informed to act responsibly in all matters that they may face.”
Jason: Just because a person is of legal age doesn’t mean they’re by default sufficiently informed, but it does mean that they have the responsibility to become so, by their own efforts. They do free home-buying seminars at the Library – the information is out there for the taking. Lots of organizations exist that will give free, simple language guides for anyone willing to bother with it. The comparison with children doesn’t fit here – children don’t buy houses. Adults that buy houses without becoming informed (buying impulsively – like children) reap what they sow.
David: “we should do what we can to protect people from those who would be predatory.”
Jason: We already have a system in place for this – it’s called a free market. First, the predatory lenders will tend to do less and less business, because they will develop a negative reputation. Granted, this takes time. But it works. Second – and this is more important – if buyers do their homework, predatory lenders will be out of jobs because nobody will want to borrow money from them. Their only option would be to straighten up and offer loans that consumers want to buy. Since that’s not what consumers are demanding (they’re demanding more than they can afford, currently), lenders follow basic economic principles and supply to the economy that which is demanded.
A large portion of consumers today have become too accustomed to getting what they want when they want it. They’re not willing to postpone consumption until they actually have the money, so they borrow. If they can’t borrow traditionally for the big new toys (or homes) they think they can’t live without, they borrow in more risky ways. But the risk they take on is of their own making. They choose it because it means they can have what they want now. A more patient, less greedy consumer base would solve the problems of bad debt more completely than regulating lenders ever will. The responsibility, and the only hope for real change lies with you and me.
I think we have each made our positions sufficiently clear so I will not pursue the areas where we disagree. Let me just say that I do agree with the last paragraph you wrote. Our society is not willing to postpone getting what they want in order to get it safely or wisely. We are too willing to take risks for things that are really unnecessary (a larger home, more toys, a new car when the old car was just fine). My only disagreement with that paragraph is the last sentence. The only hope for real change lies not with those, like us, who do not live in the go-for-broke-because-I-want-it-all-now lifestyle. The only real hope for change lies in society as a whole recognizing the damage done by the hyper-consumerism that is being promoted everywhere in the name of a free market economy.
http://www.npr.org/templates/story/story.php?storyId=9156929
It isn’t mortgages, but it’s about CC industry taking advantage of consumer for the love of money.
The parents spent $5,000 to set up for a new baby. The baby was raised, married with children of this own before they had finished paying off the credit card at the minimum payment each month (34 years)
Also it took 80 3rd year law students 20 minutes as a group to read the fine print and figure out what the interest rate really is. Is it any wonder a lay person is confused?
And then there is the clause – “may change the rate at any time for any reason.” does that make you feel safe? The reason may be that you spoke to another credit card company, or worse yet, the reason may be that we were just checking to see if you’d notice.
Interviews
Elizabeth Warren on the Credit Card Industry
Fresh Air from WHYY, March 27, 2007 · Harvard Law Professor Elizabeth Warren is an expert on bankruptcy and is an outspoken critic of consumer lenders.
Recently she appeared before the Senate Banking Committee to discuss the abusive lending practices by credit card companies. She considers the interest charges and late fees imposed by credit card companies to a “hidden tax” on cardholders.
Warren is also the author of The Two-Income Trap: Why Middle Class Mothers and Fathers Are Going Broke.
Thanks for that link. Like you say, it is not the same topic (mortgages) as the post, but is is the very same problem.
I’m going to have to agree on this one. I still think it’s the consumer’s responsibility to learn all they can and then avoid unscrupulous lenders (credit card companies), but unlike mortgage lenders, credit card companies go to great lengths to hide and distort information so that it is difficult to understand. They intentionally target those that are least likely to thrive on borrowed money, because they’re the ones most likely to pay minimums and therefore more interest.
Though the credit card companies are blameworthy for their part, financially principled consumers can be completely free of their tactics – simply by buying what they can afford, delaying consumption, saving up for large purchases, and altogether avoiding credit. Credit is a useful tool, particularly for growing business, buying a house or car, and paying for an education. Other than that, it’s almost never necessary for the average individual to pay interest for anything. So while the lenders in this case are indeed to blame for their part, the individual can rise above the fray simply by ignoring them.
That is precisely my thought on both the credit cards, and the brokers and lenders behind the foreclosures I first wrote about. I do not think that all lenders are like this, but the ones in the article had been target advertising to the people in those areas least likely to borrow safely and they failed to disclose fees and hidden costs of the mortgages they were pushing.