Bait and Glitch
It’s fair to say most people who borrow money to buy a home don’t read the fine print on documents their mortgagor requires them to sign at closing. Even if they did, most wouldn’t understand the convoluted legal-speak.
Over the past twenty years, in an effort to attract more and different types of borrowers, mortgages have evolved like tennis shoes by exploding from two basic models.
In the case of mortgages, they multiplied in fixed and adjustable rate varieties while tennis shoes morphed exponentially from the basic choice between high and low tops.
Global liquidity was high and, in the mortgage world, this translated into a money supply that exceeded demand.
This classic imbalance challenged lenders to use financing options, in the form of mutant mortgages, as marketing tools for opening new markets and expanding existing ones.
As these hybrids multiplied, lending standards lowered and offerings to less sophisticated borrowers grew. In effect, people with good credit were allowed to borrow beyond their means and those with low to marginal credit were offered a piece of the American dream.
There was something for everyone.
It’s not surprising that in a payment driven culture, the lure of a low payment is a temptation few borrowers can resist.
As a result, the volume and velocity of money traveling through supply channels was so great it created a situation where the deal was all that mattered.
Everything else was a blur.
“Come and get it. Cheap money. Easy money. Come one. Come all. We’ve got a deal for you. We promise. Just come and get it.”
They came and got it.
Our ability to loan was undermined by our inability to explain to borrowers how hybrid mortgages could be affected by changes in interest rates.
Our ability to borrow, which is partly demand, was dangerously out of balance with our ability to loan. The part that went unchecked was the inability of lenders to explain fully the varieties of mortgages borrowers to comprehend what they were doing
The part of our ability to borrow that went largely unnoticed is that part most responsible for the disaster brewing today in this market.
Lenders need to live up to their charters: Pay attention and value risk.
The American Dream is at stake.
If you can’t see opportunity in the cloud of default that’s looming overhead, then you should buy a new pair of low tops, or high tops, anything you can run in and head to the hills.
An opportunity for a confluence of initiatives from public and private sources exists.
It’s essential they associate borrower credit history and mortgage variety with market vagaries, assign a risk value, then monitor and manage the risk.