· 90% of borrowers could not identify the correct upfront cost associated with their mortgage.
· Two-thirds didn’t realize they would get hit with penalties if they refinanced within two years.
· 80% had a hard time understanding why the APR was different from the loan note interest rate.
This is absolutely startling because the data gathered came from prime and sub-prime borrowers. The sample size is also significant because it shows a decent representation of what is occurring in the current marketplace. I find it fascinating that those in the housing industry seem to take no issue with the above numbers. The line in the sand is being drawn. On one side, you have resolute bears that will refuse to pay current prices and are waiting for prices to reflect market income and rental rates. On the other end, you have housing bulls crying “personal responsibility” regarding buyers and echoing a continued growth in real estate appreciation. I can see both sides of the argument. However, when you have housing bulls saying a buyer knew what they were getting into and therefore are directly to blame (the above data shows they did not know what they were getting into), this pretty much shakes the foundation of their argument. After all, now that we factually know the vast majority of buyers do not know even minor details of their mortgages, do we continue turning a blind eye to this financial negligence?
What about personal responsibility for the mortgage industry? I guess they see it as a one way road. We have the mortgage industry committing outright consumer fraud and malfeasance by placing borrowers into homes they know that sometime down the line, they will be unable to afford. In some cases we are actually having lenders taking borrowers out of fixed conventional loans and placing unknowing buyers (aka see aforementioned borrower stats) into risky interest-only or other exotic mortgage products. Somehow this seems okay. And we wonder why foreclosures are rocketing up to the moon? Some would like you to believe that a trillion dollar mortgage industry should be held to the same standard as a financially irresponsible buyer making $25,000 a year getting into a $500,000 Real Home of Genius. You’ll never hear the real estate syndicate talk about a fiduciary responsibility because they have thrown that concept out of their lexicon. The consequence for the borrower? They lose their home and are financially screwed for many years. The consequences for the mortgage industry? Only time will tell but last year “bail-out” talk was being thrown about in the Senate. Guess who will pay this bill? The tax payer. Do you pay taxes? Unless your name is Wesley Snipes, you probably do. So in essence, the ridiculous irresponsibility of Wonderland lending will come home to roost with you regardless of whether you played into this housing bubble or not. The mortgage industry’s shenanigans will bring a collective cloud on the entire public.
The Elephant in the Room: Lending has become a Pure Sales Industry.
Local banks used to have a stake in the lending that occurred in their neighborhood. You actually had to go to your bank (physically) and meet with a representative to go over your financial statements. They would look at your income, W2s, bills, and financial statements to ensure you were a qualified buyer. And if all else failed, underwriting was more restrictive because you actually had to have a down payment. During this bubble, you literally could make up your income to jump into a home. Make up your income? Stated income baby! No interest-zero-down cash-back-loans amigos! Taking a page out of 2nd Life, you literally could reinvent yourself in a pseudo-reality made up by your own definitions. Anyone that has a sense of finance only could stand back as a spectator and wonder what the hell was going on. And a major problem is local banks passed the buck all the way to Wall Street and decentralized mortgage buyers. No longer did the local bank have to fit the bill if you went MIA on your housing payments. What do they care if you foreclose since your mortgage is now chopped up like hamburger meat and floating around in some hedge fund in
Companies such as New Century Financial bit the dust because of first and early payment defaults and were forced by Wall Street to eat some of their own crap. What happened when they got these notes back? An implosion. Mortgage insiders and even speaking to a few acquaintances in the know, sub-prime outlets operated as boiler rooms. A white board was on the wall for all to see and literally a competition of who could sell the most loans ensued. The riskier the loan the bigger the commission. And all this could be done via the phone and over the net. You can electronically sign and send statements to some lender operating half way around the country. I’m sure an
Wall Street hungry for these loans devoured anything that was sent to them. The pressure spread from aggressive outlets and affected the bottom line including your local bank. So instead of putting pressure on regulators to enforce basic financial laws, they decided to join the ongoing credit orgy. Now, you can go to your local bank for a mortgage, a credit card, mutual funds, and open up a savings account all under one roof. Although savings account are pointless since
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