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Sunday, December 23, 2007

The New York Times Perpetuates a Dangerous Politically Correct Narrative vis a vis Mortgages

The New York Times contributed to the debate on the mortgage meltdown with this piece. It is exactly this sort of politically correct analysis that leads to the dangerous legislative agenda that Congress currently is wrestling with regarding my industry.

The NY Times lays out several fundamentals. First, the rightly predict that the housing crisis will get worse before it gets better. The rightly predict that things will get even worse when ARM's (which are already adjusting) adjust to higher levels hit borrowers even more. That is the end of any correct assertions that they make regarding the housing market.

They blame Bush for not acting. The problem is there is absolutely nothing the administration or any other politician can do. The current problem is that there is a plethora of people currently in over their heads. They have bought homes they can't afford. There is no political fix for that and furthermore any bailout will only delay the inevitable and pour good public money after bad private money.

They tout a bill by my Senator, Dick Durbin, that would allow rates to be rearranged as part of any bankruptcy. This bill is nothing short of dangerous. If borrowers are allowed to reset their rates artificially as a part of any bankruptcy, then that encourages someone to go into bankruptcy. It also leaves a lot of good borrowers screaming bloody murder.

Here is how the Times sees it.

The bill also undoes a longstanding injustice. Under current law, mortgages on primary homes are the only type of secured debt that is ineligible for bankruptcy protection. Owners of vacation homes, farms and commercial property can modify those debts in bankruptcy court. But not your everyday homeowner. Under any circumstances, that double standard should not be allowed. With a foreclosure debacle unfolding, it must be rectified.

Now, I didn't know that vacation homes and investment properties can be modified, however that is no less dangerous. If that is the case, the proper course of action is to close that loophole not open up a new one. By re arranging the mortgage so that the payment and subsequently the rate is lowered that encourages bankruptcies. Think about it. You have two borrowers. One borrower makes their payments on time and the other one falls behind. The second borrower files for bankruptcy and as part of that bankruptcy has their rate and payment lowered. Not only does that encourage bankruptcies, but frankly opens banks up to all sorts of suits. If you are a borrower that makes your payment on time, and you heard about borrowers having their rates lowered because they were late, what would you do?

This is what the New York Times is suggesting as a good idea. Again, the politically correct narrative has the borrowers as helpless victims that must be protected from future malfeasance. This is simply not true. The borrowers are for the most part irresponsible. The problem is that through irrational exuberance banks and Wall Street opened up a market so that irresponsible borrowers qualified for loans. We, the mortgage broker, gladly put many of these irresponsible borrowers into loans we shouldn't have. These people are no less responsible because of the dynamics I just described. That has long been corrected by the market, however those same people continue to hold onto mortgages that they can't afford.

No politician can fix this current dynamic no matter how much they claim they can. Providing extra protections for borrowers to take advantage of in case they default in the future only encourages more irresponsible borrowers to take on loans. Because no politician or politically correct news organization would ever dare put even a little responsibility on the shoulders of the borrowers, asinine proposals like the one that Durbin is touting are given credibility rather than ridicule.

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