The high cost of bad judgment
Bad lending, bad borrowing and bad judgment by everyone. Some lenders misled borrowers, some homeowners borrowed more than they could afford and financial institutions transformed mortgages into securities that were traded like baseball cards without the bubble gum.
I was watching yesterday's wrap up on CNBC and saw Maria Bartiromo moderating a "discussion" between Charles Gasparino and Ron Insana. They were arguing about who is more to blame for the mortgage mess.
Some members of Congress would have you believe that all the bad loans were caused by predatory lenders and the borrowers were being led to slaughter by the likes of Angelo Mozilo at Countrywide. Senator Charles Schumer proposed barring lenders from making a loan the borrowers can't afford and would prohibit prepayment penalties and stated income and low documentation loans. Further, he wants to eliminate "teaser" loans with low initial interest rates that quickly rise, sometimes without the borrowers' knowledge.
In the House of Representatives, Barney Frank slipped a little gem into a bill allowing distressed borrowers to sue their evil lenders. Would either next propose that a minimum down payment be mandated by Congress as well? All lenders are not evil, all borrowers are not innocent dim-wits and the financial institutions ignored the concept of risk. There was more than enough greed to go around. Congress should not legislate a lack of personal responsibility because more homeowners did rather than did not understand the terms of the mortgage loan they signed but chose to ignore it. In most cases, it was fully disclosed and their bad judgment could prove costly.
I got an email from a website visitor the other day belatedly asking for my help. I edited for anonymity but the essence of what they asked was:
“We have signed an agreement on a new construction home and agreed to go with their lender and closing attorney. Now we feel we may have jumped in too quickly, as this is our first home buying experience. We are realizing that their lenders may not always act in our best interest and would like to have someone with experience on our side. We initially signed up with an Internet company but again we're not sure if they are really in it for us.”
While it was too late for me to help them since they have an agency agreement already in place, I suggested they consult with a real estate attorney to help them solve their problem. They opted to "save" money by signing up for a rebate if they purchased through an online real estate firm and lender. As Seinfeld would say, "not that there's anything wrong" with a rebate so long as you know what you are doing. In this case, their bad judgment will likely have an associated high cost. But who is really to blame for their current mess?
The issue is personal responsibility. There are sellers who want to save money by selling FSBO. There are buyers who think that they can deal directly with the listing agent and save money in the transaction by representing themselves. In both cases, it can be successful. But if it isn't, who is to blame and will Congress bail you out?