Wes Ball: Why selling sub–prime mortgages worked so well
by Miki SaxonBy Wes Ball. Wes is a strategic innovation consultant and author of The Alpha Factor – a revolutionary new look at what really creates market dominance and self-sustaining success (Westlyn Publishing, 2008) and writes for Leadership turn every Tuesday. See all his posts here. Wes can be reached at www.ballgroup.com.
Is there really a lending problem? I know several people who doubt it.
One is a local car dealer. He was almost dazed as he related a story to me about selling a used car to a woman who had a bankruptcy five years ago. He sold her a nice car for $27,000. She did not have the first payment she needed to make the deal. Three banks (Bank of America, Citizens Bank, and one other I can’t recall) all offered her a loan for $32,000. That’s on a car that would only give her $22,000 on trade-in, if she sold it back one week after consummating the deal.
I also know another young couple who just purchased a $19,000 van. They had no problem getting a loan despite the fact that they have very low income. The rate was 18.5% – about three times what should be available. When an older and wiser friend challenged them that they could not afford the payments needed, they said, “Well, they must know what they are doing. They offered the loan to us.” The friend helped them sell the car, pay off the debt they still owed on the van, and get them into something they could afford.
So what’s wrong with these scenarios?
In the first case, at least one of those banks is in the midst of getting a getting an infusion of taxpayer cash from the U.S. Department of the Treasury, because they lost so much money on poor-quality loans. In the second case, the justification for making a really bad decision was that the blame was really on someone else. Worse yet, someone helped them get out from under the burden, but it is obvious from talking to them that they really don’t understand what was wrong with their decision.
We’ve just gone through the scariest financial event in my lifetime, but we aren’t through the consequences of banks, mortgage companies, investment companies, investors, consumers, and the U.S. government all thinking they can get away with making really stupid financial decisions because the blame can be cast upon someone else. It’s like watching three year olds pointing fingers at each other and expecting mom to “buy” it.
What is it going to take for us to finally understand that it doesn’t work to either expect someone else to make things right for us when things go bad or to do things that enable those persons making bad decisions to go on making bad decisions?
Isn’t it time that we let people take responsibility for their decisions?
If people want to have the freedom to make decisions for themselves, shouldn’t they also be required to take the consequences of those decisions?
Your comments—priceless
October 28th, 2008 at 9:57 am
Hi Wes, Although I agree with you regarding personal responsibility, I temper that with the belief that people are entitled to an accurate, understandable-to-them explanation of what’s involved and what it means economically. That’s not what many of the people losing their homes were given. Most of what they heard was marketing hype with all the upside and little-to-no downside except in the ultra fine print.
October 28th, 2008 at 10:46 am
I think there is something to be said about personal responsibility, as well as for transparent lending practices and language. Of course, the lenders made their decisions to loan to obvious credit risks, just as much as buyers made the decision to accept loans they maybe couldn’t afford.
My issue right now is that there seems to be a double standard in some circles: Let people accept the consequences of their decisions, but we’ll bail out the companies because we “have to.”
October 28th, 2008 at 11:17 am
A large number of the people who lost/will lose their homes don’t fall in the category of financially savvy. Sadly, they are the ones who won’t be refinanced, while many who just took advantage of grabbing cash will be able to refinance.
I stopped my retired neighbor from refinancing with an interest-only-low-payment-giant-payment-jump-two-years-later that his friend had recommended and I would class him as a typical example of the average American’s financial savvy.
Regarding the bailout, I view it in much the same light as cleaning up after a party where people drank too much and got sick on the furniture—you really don’t have a lot of choice. You can’t leave the mess because the furniture will rot and the room will stink.
October 28th, 2008 at 12:03 pm
Miranda and Miki:
Just as “ignorance of the law” is no excuse, so also is “willful blindness” to the realities of financial responsibility. I know all too many persons who took mortgages they could not afford, giving the excuse that the mortgage company believed they could afford it. Sorry, but that’s willful blindness.
There were very few cases in any of this fiasco where “fine print” played a role in the deception. It was self-deception, based upon a desire to have something that was not attainable and a willingness to blame someone else for the mistake if a miracle did not happen to make it work out. There was also an inexplicable belief that someone would make it work out for them.
The same thing goes for the organizations plying these mortgages. It was willful ignorance. No one with any financial savvy could possibly believe that financing something for someone who could not afford it could turn out any way but badly. But, again, there is and has been a belief that someone (specifically, the U.S. government) will make it right for them if things went wrongly.
I agree with Miranda that we should not be “bailing out” anyone that willful. However, I also agree with Miki that we were forced into this by how far the government allowed this to go. Her analogy of the sick drunk is all too accurate.
The trick is how to ensure that we don’t face this repeatedly. As long as there is a justifiable belief that someone will bail us out if we make a willfully ignorant decision, we are in trouble. Whether it is individuals, business leaders, or elected government officials, we should all be held responsible for our decisions and their consequences. The Barney Franks and Chris Dodds of the world would not be able to ignore their flagrant disregard for the risk they were creating. The Ken Lewises, Frank Reines, and Edward Liddys of the world would not be able to claim that “the government made me do it.” And the 4% of all mortgage holders who should never have qualified for a mortgage much less be given one would not be able to claim that “the mortgage company must have known what it was doing.”
I believe that the only time we should “bail out” someone is when we also take away the possibility for that person to do the same thing again. As it is, we have not recognized this problem and are only setting ourselves up for more of the same, if we do not quickly open our eyes to this truth and stop enabling such blindness.
Thanks for both of your comments.
October 28th, 2008 at 11:04 pm
I just read a great book that discusses this very topic….bad decisions. “Deadly Decisions,” written by Chris Burns
was an eye opener for me. The biggest lesson I learned from reading this is, How did these mistakes get made, and what can we learn from them? Too bad this book wasn’t around for all of the home lending companies to read, before giving out house loans to to everyone, including those who couldn’t afford it in the first place.