Nuanced Notions II

As we deconstruct the subprime fiasco and attempt to fix the problems, everyone has an opinion about where the fault lies for the whole mess. Some claim it was unscrupulous lenders, others say it was reckless borrowing. For the record, I think it was a little bit of both. Whenever we reach the peak points in any cycle, greed tends to distort everyone’s ability to make a rational decision and bad stuff happens.

Were there aggressive mortgage brokers who pushed people into loans that paid more handsome commissions? Sure there were—these are the same types who happily sold IPOs to the public in the late nineties when neither the sellers not the buyers were conversant in the risks that existed. But there were plenty of borrowers who today are crying foul, but back two years ago, were bragging to their neighbors about their low mortgage rates. It seems highly inconceivable that all of the borrowers were poor, unsuspecting souls. As in most booms and subsequent busts, there were probably some small number of out and out fraudulent loans and thankfully we have laws to deal with those. But the rest of those individuals and institutions who were caught up in the greed of the moment are probably paying the price they deserve to pay.

Regardless of where you fall on the blame issue, it is clear that the government is planning to get involved now. On Monday, Treasury Secretary Henry Paulson announced that he is aggressively pursuing an agreement with lenders and investor groups to freeze rates on subprime adjustable rate mortgages at their original levels. The plan is designed to prevent a surge in home foreclosures over the next year or so. I have a split opinion about the government involvement: as an investor, I like any action that helps to restore confidence in the economy and when Uncle Sam keeps your mortgage payments lower, you may have a few extra bucks to pump into the economy.

But then the CFP® in me takes over and becomes angry about the proposal. It’s people like me who kept providing counsel to clients, radio listeners and TV viewers, to “stick to the plain vanilla thirty-year fixed rate mortgage!” Now when there is supposed to be some sort of relief as a result of “doing the right thing”, the government pokes the responsible folks in the eye! The bail out seems unfair to those would-be homeowners, who waited patiently as they accumulated their 20% down payment to qualify for a conventional mortgage. To add insult to injury, the good guys now have to face the fact that as taxpayers, they will be forced to help bail out their irresponsible neighbors. Ouch—that smarts!