In Oliver Stone’s new movie Wall Street: Money Never Sleeps, Michael Douglas’s character relates the story of the seventeenth century Dutch “tulip bubble,” when the price of a single tulip bubble came to equal the cost of a fine home. The reverence for his predecessors, the Geckos behind the curtain of that era, allows a glimpse of the man and the nature of his kind. They were pulling the same strings we’ve seen in booms and busts of every description, and we never learn from the flashbacks of a bad trip, as we used to say in the 60’s.
How long ago was the Dot Com bubble? The Savings and Loan crisis? You’d think they were centuries ago and not just in the previous decade, judging by our collective lack of memory. The practices and excesses of Wall Street and the mortgage industry have inspired so many new regulations that we can finally rest easy, knowing history will not repeat itself again…right?
Finally and with great anticipation, Elizabeth Warren is here to shed light on those still lurking in the shadows with their spurious credit card practices, vague disclosures and the latest foreclosure cataclysm. The markets hardly need more uncertainty. Every new robo-scandal hits the financial sector in the only place they can’t obfuscate—their closing stock prices.
Blighted titles are another shock to the system in which those of us in Florida are again taking the lead. While it’s naive to think that the housing meltdown could have been avoided if this one tough lady had been in place sooner, one thing is certain. We would have had a lot more transparency much sooner. And it’s transparency that keeps the Visigoths within the securities and financial worlds away from the consumer’s gates.
But will Mrs. Warren’s presence be enough to save us from ourselves? She can ensure all the safeguards in the world, but at some point the American people have to be more accountable and responsible for their financial decisions—and not be victimized by a lack of due diligence and their own greed. Uh-oh, am I really saying consumers were culpable in their own demise? Absolutely.
Any adult should understand what they’re signing, a presumption that makes it illegal for minors to enter contracts. Too many grownups acted like children, letting their greed colour their judgment. The lure of cashing in on the “can’t miss” returns in real estate during the bubble-up fed the bottomless pit of Wall Street. It seems like everyone was making a killing. After all, rising prices hid all sins—until the bottom dropped out.
Back in the day, did our parents or grandparents ever think of buying a second home? A vacation home if you could afford one, a cabin on the lake maybe, but a second home as an investment? A home was where you lived, unless you were a speculator, thriving on risk, or a professional real estate investor, managing it.
It was apparent something was seriously out of whack when our 70 and 80-year-old clients were calling to join the Florida real estate party. Their families were urging them to buy & flip houses instead of keeping their savings in CD’s—against their lifelong instincts.
Mortgage companies were all too willing to provide the loans these people never should have had. Option-ARM’s enticed people with 1% or interest-only monthly payments. Did they really understand negative amortization? They certainly did when their rates adjusted and by then the originator had pocketed all the extra commission received for generating these loans as opposed to the harder-to-qualify-for traditional 15 and 30 year mortgages. And escrows? You don’t need no stinkin’ escrows! Values were rising so fast no one thought twice about next year’s payment shock.
When Senator Mel Martinez was appointed George Bush’s Secretary of Housing and Urban Development, he purchased a home in the Washington DC area. After he went to his own closing, he was quoted in the Wall Street Journal saying how appalling the experience was. His settlement statement bore no relation to the estimate he was given, like tens of millions of other Americans.
“I’m an attorney and the head of HUD and I didn’t know what I was signing,” he said. HUD is responsible for FHA, Fannie Mae, Freddie Mac and regulating the housing and real estate industries. If this is difficult for an educated lawyer and the Head of HUD to understand, how could average Americans ever hope to?
realising the susceptibility to consumers he was charged with protecting, he proposed a rule to limit the discrepancy between the Good Faith Estimate and the closing statement to a maximum of 10%. Well, it only took 9 years to get past the phalanx of lobbyists from all the culprits who fought to retain their ability to not deliver what they promised in order to raise their bottom lines.
Countrywide Home Loans was the most well known bait and switcher, according to the numerous whistle blowers who have testified, but they were not alone. Bank of America, Wells Fargo, PNC and others became the depository of the slag left behind by Countrywide, Wachovia, National City and others.
It was after reading Senator Martinez’s shocking admission that we I decided to simply eliminate estimates from the process. And if we can do it, any other bank or mortgage company can and should as well. The borrowers have one flat fee they can use to shop for the best deal at the lowest available rate. They are also spared the delays mandated by new disclosure rules every time a fee changes during the typical 30 to 60 day process. Preventing delays are critical to avoiding compromising a purchase transaction, so realtors are happier as well.
By issuing a credit to every borrower for the difference between the prequalification quote and the actual settlement, all of our clients’ costs are fixed. And we can match any competitor’s costs and interest rate by increasing the credit. Current HUD Secretary Shaun Donovan would be proud. He predicted all the recent reforms would save borrowers $600 to $700 per transaction—about the size of our average credit on every mortgage loan. Our smaller margins are offset by volume—after all, why would anyone want an estimate when they can have a guarantee?
For borrowers’ sake, I hope that this is the path our industry takes. No one would ever buy a car or a flat screen TV based on an estimate and then accept a price 10% higher—why do they have to in the largest transaction of most people’s lives?
Elizabeth Warren will no doubt be the forceful face of consumer protection. And I dare say if she or Mel Martinez could’ve successfully limited estimates in the mortgage process a lot sooner, we would have prevented much of the subsequent roller coaster ride to the current state of affairs. What we really need is to keep our tulips away from the steroids of irrational exuberance in the first place. Consumers need to recognise their mistakes, do their homework and get quality advice in their money matters — but they also need to be empowered to do so with fixed closing costs and transparency.
Stan Blacker is the president of Mortgage Resource Partners in Clearwater, Florida and Atlanta, GA. He can be reached at [email protected]