Not So Fast

It's not just the mortgage industry crisis that is generating knee-jerk, ill-conceived responses based on rhetoric rather than fact and analysis. It's a social epidemic.

Tom Keane makes the point today in his perspective piece in the Boston Globe Magazine today (Oct. 21, 2007). Keane cites several recent high profile incidents and the response to them and says this:

"Each of these incidents follows the same pattern. A dramatic event occurs, and we rush to judgment. The problem is these judgments were not based on the facts."

Keane's proposed, and correct, solution: "when the next tragedy occurs, take a deep breath, study the facts, and figure out what happened."

Will we? Doesn't feel likely as I read the rest of the paper this morning. But it's a darn fine idea.

The Dubious Poster Child of the Mortgage Company Lynch Mob Movement

So, picking up briefly on my rant from yesterday, I remember when I read yesterday's article it talked about this poor woman who had a monthly income of only $1,800 and had somehow been saddled with a mortgage with a monthly payment of $7,000 -- the poster child for the need to rein in those nasty mortgage companies. I thought, "you can't extrapolate out from a handful of bad events to condemn a whole industry." Still, that sounded pretty awful.

So today I'm reading an article about how mortgage brokers get paid on the "spread" -- how high a rate they sell you. Now, that did give me pause. I didn't know that and that gives you the same queasy feeling about going in for a mortgage as you get when you go to buy a car, except writ large -- am I going to get buffaloed into paying too much? Not a pleasant thought at all.

But as I read the article, I came across another reference to the poster child -- $1,800 income, $7,000 payment. Egad, can this be true? How could this have happened?

Well, this reporter let slip a little fact that gives us an explanation. The mortgage was to buy two multi-family buildings. In other words, this person was trying to become a player -- a landlord -- an owner of income producing property that would make her money! How many units were there? How much was the income from the units? None of this sort of information gets disclosed. We just get the jingoistic formulation of $1,800 income, $7,000 payment. Malarkey!

This woman placed a bad bet on a business venture, which happens every day. If it had gone well, she would have likely been lionized as a courageous visionary who lifted herself out of poverty through astute investments and the willingness to take a risk on creative financing. But where it went wrong, and it turns out she made a poor business decision (as did the company that loaned her the money and which will doubtless lose money on the deal), all of the sudden she's a victim. This is disgraceful. If you want to reap the benefits of taking a risk, you have to be willing to suffer the consequences of losing if the risk goes against you.

Tell me about the economic incentive for brokers to sell you the loan with the highest interest rate they think they can get away with. Now that sounds like a situation that is going to lead to abuse and the brokers will have to work hard to convince me that should be allowed to continue.

But cry to me about a business deal gone bad? And worse still, write it up and omit most of the facts, boiling it down to two, misleading facts that make it sound way worse than it is? The reporters and politicians using fragments of stories like this are a much bigger problem than the entirety of the mortgage industry meltdown. How much of what you read in the paper today was "true"?

The People's Republic of Massachusetts Strikes Again

Let me introduce this post with the clear statement that this post (and all of them for that matter) reflects only my personal views and in no way necessarily reflects the view of my law partners, associates, colleagues or Firm.

I read in the Boston Globe this morning that Massachusetts has taken the lead on imposing punitive regulations on the mortgage industry in light of the current meltdown. This strikes me as the worst form of political hack, knee-jerk, populist, feel-good pablum for their constituents that will have long term, bitter consequences for the people of Massachusetts. There are already legal doctrines on the books to protect people from true predatory abuses.

What we will have now is a system that: (1) will ultimately make it much harder, even impossible for people who are marginal credit risks to find a lender who will give them a shot at the so-called American Dream by loaning them money to buy a home; (2) will drive down real estate values in the Commonwealth of Massachusetts; and (3) will inflict higher costs on people who have good credit and deserve mortgages on good terms. None of these outcomes are good things. In exchange, what do the people of Massachusetts get? A bunch of politicians grandstanding around about how they are protecting their constituents. Malarkey. This is really bad news for Massachusetts residents.