Sushi Money

     In a not too surprising move, the major Democratic Presidential candidates have begun to make political hay out of the mortgage and subprime lending issues.   This article discusses how Senators Dodd, Clinton, Edwards and Obama have all made statements or introduced legislation to try and “remedy” the mortgage lending system.  Why is this not surprising?  Because quite simply it speaks of more government regulation and intrusion into individual and business owners lives in America.  Increased government regulation is often the Democrats answer for “fixing” perceived problems in society.  Unfortunately I think they are making too many assumptions, most of which involve the belief that mortgage brokers are primarily responsible for the problems we are facing with subprime loans.  First of all, the subprime lending mess is only a tiny fraction of all mortgage lending in this country.  Of that tiny fraction, only a portion of borrowers are defaulting on their loans.  There is no question that lending standards have been too lax for too many years, and that loans were made available to people who shouldn’t have been approved for them. What about a borrowers responsibility? If there was outright fraud and deceit in the loan processing, then absolutely… go after those lenders.  But do we need to “overhaul” the mortgage lending industry simply because of lax lending standards and a few predatory lenders? 

    The article cited also shows how it’s not only the lending industry that is at fault here.  Wall Street and the financial industry have embraced these loan products as investments.  Much of the subprime mess is related to hedge fund investments gone bad also, and that’s why we’re seeing such market volatility and panic among investors around the world.  So overhauling the mortgage lending industry will solve these problems too?  I don’t disagree with all of the ideas or calls for action by our political leaders.  Senator Dodd’s ideas for example involve tightening underwriting standards on loans and reducing the “no doc” or “low doc” loans that many borrowers have been presented with.  I’m all for improving lending practices and providing increased clarity for potential borrowers.  But I disagree strongly with his call for requiring lenders to escrow for taxes and insurance.  So the government wants to become the “big parent” and ensure that borrowers pay their taxes and insurance on time?  I don’t know about you, but I don’t need the government telling me how to manage my money.  With my current mortgage for example, I pay my own taxes and insurance payments, and that flexibility is very important to me.  Instead of putting my money in an escrow account, I can keep it in my own savings account earning interest.  I can plan my insurance and tax payments for the optimal time of year based on my savings and household expenditures.  With escrow accounts, one often has to put in far more than necessary, and well in advance, simply because the lender requires it and federal regulation says they can do so.  I don’t want the government telling me I have to do that.  How can I pay my taxes and insurance myself?  Because I have a good credit rating.  With an excellent credit score, you can often request from your lender that you pay your taxes and insurance yourself.  Some lenders or loan products will not allow this, but many do.  It pays to shop around and ask first. 

     Senator Dodd also wants to get rid of all prepayment penalties on loans.  At first glance this sounds like a great idea… I cannot stand prepayment penalties and will never take out a loan that has one.  But again, why should the government decide for the financial institution how they should do business?  There are valid reasons for loans with prepayment penalties, most often involving loans with really good (low) interest rates.  In exchange for a really low rate, a mortgage company might include a prepayment clause to help make up some of the difference on the interest rate, etc.  It depends on the loan product, and it may also be tied to credit standards and risk. These are businesses, and they are not in business to give money away.  Some people want the choice of a specific loan product, even if it does have a prepayment penalty.  I don’t, but if someone else does, that’s their choice.  I don’t think the government should have a hand in it. 

     Ultimately, I believe with more government regulation we will see increased costs and interest rates for borrowers on average.  Why?  Because there is less flexibility and choice for consumers, and less incentive for financial institutions to develop anarray of lending and investment products that satisfies both borrowers and lenders needs, as well as attracting investors (aka Wall Street) to provide the liquidity that makes the world go round.   Less choice is not a good thing in terms of business and saving money.  We want competition and choice, and with less government intrusion we achieve those goals. 

     That being said, I’m all for improving mortgage lending to help improve consumer choice and opportunity as well as requiring fair practices by lenders.  Ambiguous perhaps, but Senator Edwards for example has talked about banning “certain fees” (I’d like to see what fees he’s talking about), and establishing uniform broker licensing requirements with a national database for disciplinary infractions.  Hmmm… who’s going to pay for that “national database”?  Yep… taxpayers and borrowers.  I like the idea of uniform broker licensing, but believe the States should have the primary authority in that regard.  After all, it is at the State and local level that people take out mortgages for homes… we live in communities and often those communities have unique needs and cultural approaches to conducting business.   Don’t we have State requirements for licensing and lending anyway?  

   Finally, I have to make a comment about the choices and actions that we, as borrowers, make in the lending process.  No one forces us to sign on the dotted line.  The problem for too many people is that we are not smart enough or educated enough to know what we are signing and how to manage our financial lives.  Increased clarity and knowledge about the mortgage loan process is always a good thing.  When someone takes out a loan, they don’t do so with the intent to default or give up their home in foreclosure.  That is a traumatic and life-changing event that no one desires.  Many financial institutions are currently working with customers who have problems making payments to ensure they keep their homes and continue paying on their loans.  The bank certainly doesn’t want our homes and a defaulted loan.  But as borrowers we are legally and financially obligated to pay on that loan.  We must do our homework and make our financial decisions rationally based on our income and lifestyle needs.  Don’t buy more house than you can afford.  If you can’t afford a 30-year fixed rate loan for the house you want to purchase, then you can’t afford an adjustable rate mortgage for that same house… especially down the road.   Maybe not always true- but it’s a good rule of thumb.  How can the financial world function without legal requirements for borrowing and lending?  It can’t.  I’m also a strong advocate for financial literacy education.  Many states are now including financial management education as a requirement for high school graduation.  It’s about time… and we need to do more.  That’s something I’d like to see our political leaders talking about.

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