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March 26, 2007 (bankrate.com)
As concerns about subprime mortgages plague the nation's leaders and lenders, America's homeowners are confused and worried about their own mortgages, according to a recent poll commissioned by Bankrate.com.
In the survey conducted by Gfk Roper, homeowners with mortgages were asked what type of mortgage they had. A stunning 34 percent of the homeowners had no idea.
"That's a symptom of the complexity of the mortgage market today," says Ken Wade, chief executive officer of NeighborWorks America, a nonprofit organization that provides financing and training to neighborhood-based housing organizations.
A generation ago, mortgages were made primarily through banks. Today there are many more types of organizations making mortgage loans, some of which are less regulated than banks. Adding to the confusion is the variety of loans now available to borrowers. "There is a proliferation of new products that come on line just about every week, and I think it creates confusion among consumers," says Wade.
AntiSpin: I used to write for bankrate.com, so I have a certain bias, but their research is hard to argue with. So much for the idea that only drug addicts and old ladies who were sold crazy mortgages by sleazy fly-by-night lender reps are going to get hurt in the ongoing credit epiphany, now in progress.
This story offers a statistical revelation: a lot of perfectly intelligent home dwellers with good credit have no idea what kind of mortgage they have.
Am I surprised?
For about, oh, 20 years I've given my friends the following lesson when they ask me for credit advice. The advice request usually comes in the form of, "We're buying a car and want to know, should we use the dealer's financing or home equity?"
I start off by telling them that the right amount of your credit to use to buy a depreciating asset, such as a car, is zero. If that fails, because they don't have the cash, the next question is, "What do you mean, 'my credit?' It's mine? I thought the fill-in-the-blank (bank, car dealership, mortgage lender) was lending me money, you know, giving me something?"
Which reveals problem #1: many highly educated citizens of the USA understand exactly nothing about money and credit. Forget for the moment who's to blame, but it's a fact. The person in question is a high educated person, wise in many respects, who you may even know by his byline if you read the national newspaper he writes for. However, he and his wife–dear old friends of many years–know considerably less about money, credit, and cash flow than the owner of the Main Street pet store in Tumbleweed, Kansas. If the pet store owner knew as little as they, he'd be out of business. My friends can continuously compound their errors because the credit system is designed to exploit the Monthly Payment Consumers not educate them.
Next I ask, "There are two kinds of transactions when you buy something. What are they?"
Again, not a complex question. Not five or a dozen, only two types of transactions. My friend and his wife are stymied.
"Cash or credit," I reply. "A cash transaction results in a reduction in the amount of your savings and a credit transaction a reduction in the amount of your credit. Also, a credit transaction results in a debt."
"Oh." They say.
I go on.
"The reduction in your credit means that you have less in your 'credit account' to tap for future borrowing, whether for good purposes or ill. A debt is a lien on your future labor–in economics terms 'rent'–such that you are, in affect, renting your future labor to those to whom you are going into debt. And at a discount, due to inflation."
"Um, that doesn't sound good..."
"No it isn't. Let me make it simple. If you are borrowing money and the value of the asset you are borrowing money to buy is not worth more when the debt is due in real–inflation adjusted–terms than it was worth at the time you borrowed the money, then you are agreeing to sell your labor at a discount. From the standpoint of your long term standard of living per unit of labor, you are better off living without the purchase at all, unless–and this is the big promise–you can outlive your creditor's claim on your labor, such as when a politician relieves you of it."
Usually, right about here we changed the subject.
A hundred years ago, a child with a basic education understood this. Now, hardly any well educated adult understands this. Instead, new loans are invented to increase the number and cost of rents on the Monthly Payment Consumer's future labor.
Even the venerable James Grant doesn't get it, as we can see from this otherwise typically brilliant Grant performance. Paraphrasing, James says that we had credit bubbles centuries before the Fed existed. Creditors and debtors go mad on occasion, so don't blame the Fed.
I'll gladly defer to James on matters of the credit markets generally, but I'm going to pull out my credentials as a bubble expert to say: nonsense. The credit system makes idiot savants of average citizens. If it's not apparent where the bubble started in any instance, it's only because one hasn't looked hard enough for its source–always, an extraordinary infusion of credit into the system. Behind every asset bubble is a government, a central bank, a bank syndicate–issuing some new credit. A bond offering is the usual way, but the credit can take many forms.
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Sandra delivered the usual motherhood and apple pie story about the benefits of new financial technologies, which by re-labelling junk mortgages AAA via the magic of securitization made the dream of home ownership a reality for millions who would presumably otherwise be–ugh!–renters. Here's an example of Sandra's testimony:
2001 Revisions to HOEPA Rules. In 1994, Congress enacted the Home Ownership and Equity Protection Act (HOEPA) as an amendment to the Truth in Lending Act (TILA), in response to testimony before Congress about predatory home equity lending practices in underserved markets, where some lenders were making high-rate, high-fee home equity loans to cash-poor homeowners. HOEPA identifies a class of high-cost mortgage loans through criteria keyed to the loans’ rates and fees and requires creditors to provide enhanced disclosures of, and to comply with substantive restrictions on, the terms of those loans. The Board implemented HOEPA through revisions to TILA rules effective in 1995.
In 2001, the Board revised the HOEPA rules in response to renewed concerns about predatory lending. The 2001 rule changes, effective in 2002, extended HOEPA’s protections to more high-cost loans and strengthened HOEPA’s prohibitions and restrictions, including by requiring that lenders generally document and verify a consumer’s ability to repay a high-cost mortgage loan. In addition, the rule changes addressed concerns that high-cost loans were "packed" with credit life insurance or other similar products that increased the loan’s cost without commensurate benefit to consumers.
You get the idea. You can just imagine your Congress-critter listening to this, like your Golden Retriever listening to you explain why he should stop chasing squirrels. You say, "If you chase squirrels you won't catch them because you are bred to chase not catch, you see, for herding, so you lack the instincts necessary..." He hears: "Blah, blah, blah..." (Sandra, don't forget rule #1 of politics: If you're explaining, you're losing.)In 2001, the Board revised the HOEPA rules in response to renewed concerns about predatory lending. The 2001 rule changes, effective in 2002, extended HOEPA’s protections to more high-cost loans and strengthened HOEPA’s prohibitions and restrictions, including by requiring that lenders generally document and verify a consumer’s ability to repay a high-cost mortgage loan. In addition, the rule changes addressed concerns that high-cost loans were "packed" with credit life insurance or other similar products that increased the loan’s cost without commensurate benefit to consumers.
Of course, according to reports by such Champions for The Poor as Credit Suisse and Lehman Bros.–not to mention a few real life champions for the poor, such as the Center for Responsible Lending and the Center for American Progress–a few million of them will be renting again soon enough, except this time without any credit, as it was chewed up and spit out in the process of foreclosure.
Thanks financial technology! For setting millions up for failure.
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