The Borrower's Responsibility

Caveat Emptor, Latin for “let the buyer beware” is a phrase we have all seen but too many of us, don’t live by. At the end of the day, we are responsible for the decisions we make. The world is full of con men and thieves constantly looking for ways to separate us from our assets. The government can only do so much to inhibit their ability to steal from us. Your last line of defense is your personal ability to analyse the information available to you and making the decision.

What does this have to do with mortgages? Over the last few weeks I’ve been addressing how each section of the mortgage market contributed to today’s problems. Companies made mistakes, employees of the companies made mistakes and con men and thieves have entered the industry. The trouble in today’s mortgage market derived from poor business decisions, incompetence, greed and fraud. It’s impossible to identify the magnitude of the contribution that each one of these components made to the problem. What we do know for sure is that in each instance the borrower let his guard down and either made a poor decision or allowed himself to be a victim.

We are all human and we all make mistakes. We do whatever we can to avoid injury, both physical as well as fiscal, with varying degrees of success. The big problem we face when dealing with our own personal financial position, is being objective. Emotion clouds our judgment. Emotion will make us hold onto a property longer than we should; it will lead us to believe that “everything will work out fine” without any basis in fact; it will enable us to ignore a problem, blindly hoping it will “go away”. In its worse case, emotional attachment to property will set us up to be scammed. It allows us to ignore the concept that something can “be too good to be true” and only see it as a solution to the problem. It is this mindset that a con man looks for.

During the period of easy lending that we’ve just been through I would tell my clients “getting the mortgage is the easy part, living with the payments is the hard part.” By addressing how the new housing expense was going to fit into the client’s budget we could see how their lifestyles would change. In many cases, this was an eye opener. Some clients saw how overextended they were going to be and modified their house hunting to suit. Other clients that were looking to improve their cash flow via a debt consolidation, quickly realized how deeply in debt they really were. Some discovered that they weren’t going to lower their payments enough and a refinance wouldn’t be the right course of action. There were even some that didn’t like what I was saying and went to another mortgage broker that told them what they wanted to hear.

There are areas of the country where there was a high level of investor speculation that is now seeing depressed prices such as the Florida market. Investors here are suffering due to one of a number of reasons. They could have been experienced investors that made a bad business decision in buying. They may have been novice investors that got caught up in the buying frenzy and ended up, in over their heads. There is also the group that was conned into buying. They are all suffering the same way from a down market but for different reasons. How many of these individuals may have avoided the problem if they would have just taken the time to do a more detailed evaluation before making the decision to buy?

We have other markets, such as Ohio, that have been hard hit with the contraction of the auto industry. As high paying jobs became hard to find, many homeowners over the last few years decided to cash out the equity they had in their homes. The theory was that they would ride out the soft employment market. They believed that things would get better and they would soon be earning the income they were accustomed to. The employment picture never improved, the values of their homes have declined and the mortgages started to go into default.

The news media keeps telling us that these mortgages should never have been written. If it weren’t for the cash out refinances, these homeowners would still have equity in their homes right now. There is one big problem with this statement. If these homeowners didn’t refinance their homes, they would have been forced to sell at that time or would have defaulted on their mortgages then instead of now. These individuals either had the false hope that the local job market was going to improve or they were sold on the idea by the mortgage originator. Two causes of action that lead to the same conclusion.

Did the industry become too easy in approving mortgage applications? Yes. Did the volume of originations and the profits that were being generated from them blind all the people and companies involved in the mortgage market? Yes. Did the mortgage industry become a destination for con men and thieves to practice their profession? Yes.

Should the industry take all the blame for the trouble we’re in? No, there is a level of accountability that the borrowers are also held to.

Should the government enact laws that make it difficult for the con men and thieves from entering the business? Yes. Should the government, through its regulatory bodies, do whatever is possible to make sure all companies are operating in an ethical manner? Yes.

Should the government enact laws that protect consumers from themselves? No, It would make the availability of financing for individuals too restrictive and make it more difficult for families to improve their financial well being.

One of the basic tenants of the American culture is we all have the freedom to take a chance. Whether you want to start your own business or invest in your own home, you are free to try. If you’re successful you are entitled to all the benefits associated with the decision. If you’re not, you deal with the consequences, and try again. It’s this attitude that has made this country great and a destination for people from all over the world who want to establish a new life.

If we encourage the government to enact laws that protect us so completely that we lose the ability to overextend ourselves, we will never discover our true potential. We will tend become a country devoid of all innovation and creativity. Is this something we really want?