Forest Gump knew what he was talking about. He just had a nice way of saying it — people get what they deserve is more like it, and there’s enough stupidity to go around. The worst part is that no one learns from their mistakes — politicians, governments and especially consumers. Until they do, no amount of rhetoric, reform or legislation will create the self-actualized economy we consistently envision but always find just beyond our reach.
Examples aren’t hard to find of the ignorance required for the average consumer to be continually robbed of the fruits of their labour. Ponzi schemes like Bernie Madoff’s aren’t the only ones perpetuated by greed and stupidity. Every new bubble is fuelled by consumers with one of two excuses: 1) Greed is a primal force powerful enough to make even the most intelligent among us succumb to its allure; 2) stupidity is the only other explanation for what we see every day that keeps the free market system from being victim-free.
It’s not smart to leave your investments in the hands of commissioned sales people and check in once or twice a year, if that. Yet, that’s what most people do. Why would they accept a “buy and hold” strategy when that’s not what their advisors do with their own money? It would be interesting to know how many consumers switched advisors or chose to manage their own accounts after the meltdown. That would be the smart choice but I would guess the numbers are small.
Speaking of advisors, you would expect that consumers would seek one out when obtaining a mortgage. Or at least perform some due diligence for what is often the largest financial decision of their lives. They usually go to their bank or where their realtor recommends. They’re quoted a rate and an estimate of costs and assume that someone is looking out for them. They don’t shop around, and then are surprised and indignant when figures change and delays occur.
The government has stepped in with reforms in the mortgage industry designed to add more transparency to the process. And, for all intents and purposes they own Fannie Mae and Freddie Mac. Yet, the path to recovery in the housing sector has yet to materialise. The gridlock we virtually guaranteed ourselves on November 2 doesn’t exactly inspire a vision of creative solutions either.
President Obama’s choice of a new overseer for Federal Housing Financing Agency, Joseph A. Smith, brings a toughness hewn from fighting federal regulators in pursuit of predatory lenders in his state role in North Carolina. The irony of state officials prevailing over the feds as they sought to protect subprime lenders should not be lost on anyone relying on consumer protection from Washington. Our best hope of slapping the hands of Bank of America, Wells Fargo, JP Morgan Chase, et al in the robo-signing foreclosure scandal lies with the states’ attorney generals—not the feds.
If the Senate confirms Mr. Smith, he will join forces with Elizabeth Warren to find ways to even the playing field between borrowers and lenders. They can do everything they can to control institutions but until people smarten up themselves, little will change. At our mortgage company in Florida, Mortgage Resource Partners, applicants routinely tell us they want that 2% rate they saw on the Internet (rates are published daily in newspapers and www.bankrate.com for everyone to see). There’s a word for these people—greedy. Or they want to apply for a mortgage to purchase a home despite the fact that they’ve stopped making their credit card payments or even their existing house note. We have a word for these people, too—renters.
Some of these same people don’t understand the difference between an estimate and a fixed cost, which we quickly learn when we try to explain that we don’t give estimates for closing costs and applicants respond, “Doesn’t everyone?” The government allows a 10% discrepancy, which is better than the no enforcement of the estimates that existed before reforms were instituted in January. However, it didn’t take very long for banks and mortgage companies to use unenforced worksheets instead of official Good Faith Estimate forms. The bait and switch tactics continue, leaving every consumer in harm’s way once they’ve chosen a lender based on an estimate.
People need to shop effectively for financing like they would for anything else. Here’s the cost to get the rate from your bank. Here are the costs from another bank and from a mortgage broker. Compare the rates and costs and pick the best offer. There’s only one problem—they’re all estimates, and no one ever heard of fixed costs, despite the logic. We had one applicant who actually insisted on an estimate because that’s what she was getting from her bank—she didn’t recognise the difference or the benefit. As long as people are willing to be gullible, there will always be others more than will to exploit them.
We now know that bad lending practices were a principle cause of the worldwide credit crises that continues to restrain the recovery. They can’t all be blamed on the Democrats or the Republicans. There’s enough greed and stupidity to go around.
Ken Schiff is the vice president of Clearwater, FL-based Mortgage Resource Partners. He writes a weekly column for Benzinga every Monday, and he also blogs at Truth in Lending.