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You Can't Regulate Stupidity!

Baby Crying Over Adjustable Rate Mortgage

Yesterday on NPR I heard a story about a housing advocacy group in Ohio who was dedicating a large amount of money to help bailout people facing foreclosure. In that report a lady cried that her "Mortgage Broker" lied to her and that was why she was in trouble.

Well, I wasn't there and I can't tell you if what she is saying is true, but I can tell you that it's federal law that she was disclosed to. She should have received a truth in lending statement which she would have had to sign and a Good Faith Estimate, which she also would have hand to sign, from the broker (if it was indeed a mortgage broker who originated this mortgage - more on this in a sec). If the loan had an adjustable feature, she should have also received an "Adjustable Rate Disclosure" form as well.

The Truth In Lending document, which is a bit confusing, would have outlined the terms of her loan and if it had an adjustable feature. The Good Faith Estimate is supposed to be accurate within$200.00 and would have outlined the fees and charges associated with her loan and the Adjustable Rate Disclosure would have disclosed the specific terms of her ARM loan. This disclosure would have included how much it could go up or down at the adjustment and when that adjustment would occur. The Adjustable Rate Disclosure would have also given her an example of the historical performance of her index (the rate that her loan was based upon) and told her what her margin was (the amount above the index that she would be paying).

If that wasn't enough disclosure for her, more than likely, the lender who was underwriting and funding this mortgage probably sent her another copy of these disclosures with their name on it. If that wasn't enough disclosure for you, then when she got to closing she would have had to sign another Truth In Lending Disclosure, as well as another Adjustable Rate Disclosure. Wait, that's still not enough disclosure for you? She would have also had to sign the note, an adjustable rate rider to the note and the mortgage or deed of trust.

Truth In Lending Disclosure Was she not paying attention?

The mortgage industry,while not without its downfalls, is one of the most heavily regulated industries in the country. Can you imagine going into a car dealership and them having to tell you how much they were making on the sale of your new car? As a mortgage broker I have to tell you that ahead of time (Banks and Mortgage Banking companies are exempt from this disclosure for some reason, even if they are brokering the mortgage themselves???). As pointed out above, a person applying for a mortgage is disclosed to over and over again.

The other thing that bothered me by that article was the way that they blamed mortgage brokers for this problem. "My Mortgage Broker lied to me!" "My Mortgage Broker Didn't tell me" Etc. Well, I've noticed that the term Mortgage Broker is used almost as a generic term for mortgage lender. It's just as likely that the woman above was dealing directly with a Mortgage Banking Company or even a bank who was brokering her mortgage. Sub-prime mortgages are originated by all three kinds of mortgage lenders. If you don't know the difference between the three, please read my post Mortgage Banking 101, which goes into detail on the differences.

Even if this mortgage was originated by a Mortgage Broker, the program was developed by, underwritten by and funded by an institutional lender, such as a mortgage banking company, a bank or an investment company. That loan was pooled together and sold on Wall Street in the form of a Mortgage Banked Security. To lay the blame for the current Sub Prime mess at the feet of Mortgage Brokers is simply irresponsible.

Does the government need to step in here? To help these people, maybe. To regulate the industry more, I don't think so. The borrowers have no excuse other than stupidity to say that they were not disclosed to and as some comedian said once, "You Can't Fix Stupid!"

R.B. "Bob" Mitchell

ValueList Real Estate Services, Inc.

Posted by Bob Mitchell - Realtor St. Louis on 04/13/2007 02:03 PM

Comments (20)

mortgage broker, truth in lending, good faith estimate, adjustable rate disclosure, valuelist real estate services, st louis real estate thoughts

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20 Comments on You Can't Regulate Stupidity!

APR

2007

Great post! They are as stupid as a fox! They want someone else to take the heat, and blame. Document, document, document!

APR

2007

Bob-

Very true. We are regulated and required on every issue from agency to closing costs... do they think we provide these documents to look important or what? Pay attention folks..

MAR

2008

Great post! Completely false! I'm not sure who I sat down with at closing, mortgage broker, or whoever. Oh -- they disclosed alright, and disclosed and disclosed. Unless you deal with this stuff on a day to day basis, as I am sure you do, then this doesn't make sense to us "stupid people". Of course we can't prove it, because it is in writing and yes we did sign it. BUT, no one explained to us that 7% blah, blah blah was going to be added to whatever the APR was at the time. The person ushering us to sign the papers, and skimming over that section pretty quickly, tried to explain to us "stupid" people in their terms. This is what was said "Well the interest rate now is at 5.5% blah, blah, blah, so even if it does go up to 7% your still going to be lower than the average at 8.5%", in so many words. NOW if they would have told us that when your mortgage adjusts, we are going to ADD 7% to whatever the interest rate is and it is capped at 13%. That is not what was told! Yes, it is in writing -- in the 80 plus pages that us "stupid" people signed. But maybe, just maybe if they weren't rushing us through and explained to us better we wouldn't of signed. I'm sorry but that is CRIMINAL if you ask me! Fortunately for us we were able to still afford it when it jumped up because we had two jobs. Now that my husband lost his job, and I am about to, we will be heading to foreclose soon! Thank you for doing such a great job ripping off AMERICA folks!

MAR

2008

You may not be able to fix stupid, but you we can and apparently will bail them out.

The lack of personal responsibility in our nation is at the critical mass stage and we will all pay a heavy price because of it. With that said, a lot of folks were intentionally misled by Realtors, lenders, title companies....the list goes on. And I would hope that class action litigation will eventually envelope some of the scum that perpetrated the problems we face today. But we should never remove the cloak of personal responsibility in the equation either.

The right to be stupid is practically one of our civil rights! If you can't understand a good faith and til you shouldn't be buying a house.

Wow, this is wild....I'd love to know how this post got so popular after having sat for so long....anyway, thanks for the comments....

Kelli: While I do agree with you obviously, I do also take to heart some of what Kat had to say.

There were and I'm sure still are loan originators who gloss over these important documents and I'm also sure that there were some originators who were out and out scamming.

That said, I do think that it's the borrower's responsibility to know what they are signing and to all be comfortable with their loan originator. Far too many borrowers chase after the cheapest rate and discount the importance of working with a qualified, reputable loan officer.

I originated a fair number of non-conforming loans and personally, I always tried my best to make sure that my borrowers knew what they were getting into. Obviously, Kat's story points out that this wasn't always the case.

Kat: I don't know if you signed up to be updated on the comments on this post, but if you did, call me. I don't know where you're located at, but I will do my best to help you get out of this mess. Reading your comment made me realize that my title was harsh. I was reacting to the blame that has been directed at mortgage brokers in particular and again risking being harsh, you probably should have better understood what you were signing and have known your loan officer better. That said, call me and I'll see what I can do to help you.

Guy: I'm 100% for a bail out of distressed loans.....true, the people who used these programs to get into homes do bear responsibility, but the problem has gotten to a point where something has to be done in order to protect the rest of us. If it helps people who made bad decisions, then so be it, but something has to be done!

Rich: As I mentioned to Kelli, Kat's comment points out that some borrower's were not properly disclosed to. In my opinion, this doesn't release them from personal responsibility totally, but it does explain some people's situation.

Thanks for the comments!

Bob Mitchell

ValueList Real Estate Services, Inc.

Well Bob, I guess we'll have to respectfully disagree with each other on the bailout. I see the "protect us" philosophy as eventually meaning higher taxes, so you better not fall in love with your commissions...you'll see them dwindle as we're being protected.

My issue is this. Where does it end. Who is the next group we'll need to bail out of their own bad decisions. Our economy needs this enema to help us get back on the right track. If I make a bad financial decision, should you pay for it. No, I should bone up and take responsibility for it. When the government "protects us" it is nothing more than protecting those who wish to blame others for their own misguided actions.

The only thing more unconfortable for Realtors right now will be the discomfort we'll feel later when the government finds even more ways to tax us to cover the costs of the bad decisions of buyers, Realtors, lenders, Wall Street, etc. I do hope you won't protest the increase in taxes because that's what you're voting for now with a bailout.

Bob,

I loved your post and I give you much respect for responding to back to the Kat Kelly the way you did.

keep on bloggin'!

Guy: Actually, a bail out was hard for me to wrap my head around too. I think that you're right in saying that there will be a price to be paid for any bailout....in economics it's referred to as, "There's no such thing as a free lunch!".

That said, I think that this falls under even conservative guild lines for being a "legitimate role of government" in that government's role is to provide those services that the public needs, but that the free markets won't provide, at least in an adequate amount. In this case, the free markets aren't providing enough liquidity to the credit markets and housing prices are being effected.

I won't rehash my entire argument or "plan" here because it would take too long and I've already pretty much written it to death....if you get a chance, here's a link to my posts on the subject. I would love to get your feed back! One of the biggest points of my plan are that if they do it my way, it won't end up costing the government much to correct the problem and if they are lucky, they might even end up making a buck! ;-) Let me know what you think!

D: thank you for your kind words... Actually getting a comment from somebody in her shoes shed light on the fact that I was probably being a bit harsh with my tone. Again thanks for your kind words.

Bob Mitchell

ValueList Real Estate Services, Inc.

MAR

2008

Did anybody put a gun to her head to sign the documents she signed? Did she or did she not read the paperwork? It's easy to blame someone else. When she wanted a house, she called the mortgage broker and he got her into a loan. Perhaps it was a loan with unfair rates or maybe it wasn't. But we must place SOME blame back on the consumer. Generation ME is coming up now & starting to buy houses, and they have an inherent lack of the ability to take responsibility for their actions. This is scary. A generation that we coddled and gave everything to, that we didn't give little league trophies out because every child is equal on the team, a generation that we trained to believe they can be anything they want to be... when things fall apart they cannot look in the mirror and place some of the blame on themselves. Somebody else must be responsible for this bad situation I'm in. Not me! The real estate agent sold me more house than I could afford, or the mortgage broker tricked me in the paperwork. I'm sure in some cases it's true, but should the government bail them out? Where does responsibility come in here? Where does it end?

It starts and begins with fairness. We all know people who were put in homes and were a foreclosure waiting to happen. The reason for a lot of the interest only loans was because the buyer couldn't qualify for the house without it. If he couldn't qualify today, he definitely can't qualify when the interest comes due. Here is a good scenario of the loan process from what I see.

Call lender. Give lender info. Lender sends package. Buyer sends back. Buyer gets good faith in mail. Buyer signs. Buyer goes to closing. Has 300 pages to sign. Buyer signs (all the disclosures are there, where is the lender to explaint it, buyer has 45 minutes to sign). Three years later interest comes due and buyer is in foreclosure.

There needs to be more fairness. If buyers really understood what was going there wouldn't be as many homes sold, lenders and real estate agents (FSBO too) wouldn't make as much money but we wouldn't have the mess.

Erica...I agree with you to a certain extent, in the end it's the borrowers who are going to pay the biggest price for not making good decisions, but I don't think that you can let all of the other parties involved in the transaction totally off the hook.

Also, 3 years ago who could have foretold a real estate market that wasn't just "not" appreciating, but was actually "depreciating"? I've talked to numerous borrowers who have fixed whatever it was that was wrong when they accepted a 2/28 sub prime deal. They've paid down debt. They've paid off collection accounts. I've even seen them save money to be able to throw more money into the deal in order to refinance only to find that it wasn't enough. That the market moved on them and now they can't refinance.

Regarding "bailing" these borrowers out, I'm basically an economically conservative guy. I believe in the freedom to thrive and I believe in the freedom to stare based upon how hard you work and on what kinds of decisions that you make. That said, my home going down in value because some big wall street investment houses were scamming isn't of my making. My biggest reason for supporting a bailout plan is for the rest of us. Not for the borrower who made bad decisions. If they are helped in the process, all the better, but it's not for them that I think that the government should step in.

For those of you who are against a bailout, I'd love to hear your thoughts on the Fed "bailing" out the banking industry at all of our expenses. I don't seem to hear anybody bitching while they are tanking the dollar in an attempt to help the banks. They made bad decisions, shouldn't they be held accountable?

Thanks for the comment.

Gene: I don't know who said it, but the saying goes that, "You can't legislate morality". In a perfect world everybody would be fair with one another, but we don't live in a perfect world. Economics takes this into account by assuming that people will look out for their own best interests. If somebody doesn't do this it's not to say that the person who scammed them shouldn't be punished, but in the end, the borrower only has themselves to blame. Thank you for your comment too!

Bob Mitchell

ValueList Real Estate Services, Inc.

Hey Bob, when I mentioned I'm against a bail-out, I mean the bail-out of all these groups, especially the banking industry.

And while I understand you don't like your home going down in value, I just don't think it's our fault either. It happens. And if we only purchase under the assumption our homes will always go up in value, then we deceive ourselves. This is risk vs. reward. I've bought and sold plenty of homes for my own portfolio and learned this the hard way too, but never said, "hey folks, my house is now worth less so you need to help me bail out of this thing at your expese." It's not legitimate to expect others to do so.

I too am a fiscal conservative which is why I don't think the government is here to correct the bad decisions of any of us. I know it hurts when you watch your equity in a home dwindle, but it's happend to my stocsk too...it just happens despite our best efforts.

Again, if the banking industry didn't contribute millions of dollars to campaign coffers and if it were not an election year, it might be a different story, but you and I will never matter to our elected officials as much as those who can write a 250K check and not bat an eye. Sad but true.

Guy, if all of a sudden there was a giant pandemic and the US population was cut in half and my house went down as a result, I wouldn't be happy, but I wouldn't call for a bailout either. That said, there really isn't a good reason for the housing markets to be going down (at least in most markets).

The reason that it's going down is because the big guys (Wall Street and the banks...actually, that's probably redundant) were scamming and now we're all paying the price. Wall Street is who broke our financial model and the only one that can fix it is the government. Instead of attempting to bail out Wall Street, which if they let the little guy flounder isn't going to work anyway, they should put "OUR" money to work fixing what is broke and making it possible for people to have faith in owning a home.

If they don't help the little guy, I don't think that they should help the big guys. If they do nothing, it's going to be a long, long...winter!

Again, thanks for the comments!

Bob Mitchell

ValueList Real Estate Services, Inc.

I think we're in agreement on that end. I'm tired of CEO's making millions as they run their company into the ground and then look to the government for help. I certainly don't have the answers Bob, but I'm already planning for 2008 being a less than stellar year for our industry. I hope I'm proven wrong.

Based on the number of responses to this post and the lively debate, I think you've hit a hot spot for a lot of folks. Excellent and timely post indeed. Thanks for encouraging the dialogue, even debate. I find it healthy and enjoyable.

Much success in 2008 my friend.

Thanks Guy: If you get a chance, check out those other posts and let me know what you think!

Bob Mitchell

ValueList Real Estate Services, Inc.

I think sometimes there are simply too many disclosures for the consumer to read. I tell my buyers that if it feels like you are signing the same thing over and over and over again, it's because YOU ARE! But read it! You only have to read it once each time you buy a house and is worth the effort to know what you are signing.

Once upon a time, I was in the military and as a result you better believe I will read every word of what I am signing. That is not a mistake I will ever make twice. The funny thing is that at no time did the recruiter lie to me but he sure sugar coated it pretty well. If he would have told me that I would be serving 2 tours in the Persian Gulf facing a heat index of 140 degrees, I would have told him to pound sand. Of course it is just logical, right? Isn't that what the military does? Aren't they supposed to give us guns and tell us that we should point it at someones head, look into their eyes, and then pull the trigger? Somehow that was not picture I had at the recruiters office.

Maybe it is possible that this is the same type of experience that some consumers have with some mortgage brokers. I am sure that there are many that are very good, ethical, and truly wanting to HELP their customers, but there are also many out there that will not flinch to throw you under the bus if it puts another few dollars in thier pocket.

I don't like the idea of a bail out of any kind. I am sure it sucks for a lot of people right now, but sometimes you just have to learn your lessons the hard way like I did. Maybe the next time around the consumers will be a bit smarter about who they do business with, educate themselves about what they are getting into, and most important take the time to actually read and understand the documents. The closing attorney on my loan got $500 of my money. For my hard earned money he can wait an extra 10-15 minutes while I read it. If I don't understand it, he can explain it further, that is his job.

MAR

2008

Hi Benjamin: Great comment...except.....you just did a little of what prompted the post in the first place....that is, you talked about consumer's experience with mortgage brokers...as if this was just a mortgage broker's problem.

These loans were originated by all kinds of originators, not just mortgage brokers!

I loved your analogy to the military recruiter, I imagine that some mortgage originators were a lot like this. A long time ago when I signed up for the marines (I didn't end up going) I remember the recruiter showing me tourist pictures of the beaches around San Diego. Somehow I doubt that Paris Island was quite as scenic!

Thanks for the comment!

Bob Mitchell

ValueList Real Estate Services, Inc.

Sandra...didn't mean to forget you there! Sorry! You're right of course, you get to closing and there is a stack of paper several inches thick and it's easy to just say...."where do I sign?". While there are people who do read every single paper, they are few and far between and this is one of the reasons that the consumer needs to pay attention throughout the process. The consumer also should feel comfortable with their loan originator.

Their loan originator should be trustworthy and have a good reputation. Preferably they should come recommended by somebody that they know. If this isn't possible, then the LO should be able to provide references that can be checked.

Even then, the consumer needs to at least have an understanding of each form that they are signing and to verify that the forms are saying what they thought to be true. In the end, it's what the form says that will rule!

Thanks for the comment!

Bob Mitchell

ValueList Real Estate Services, Inc.

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