Iíve just finished reading parts of Howard Zinnís history of the United States. His history is different from any you will ever read. Some of it may be documented well enough to be taken seriously. He tells the story of the American acquisition of Indian lands. Some agents, he says, simply loaned them money, not because they cared whether the Indians needed money, but because they believed the Indians too ignorant to resist. Since the Indians had no means to ever repay the loan, soon the agents could take the Indiansí lands legally for pennies on the dollar. By this process the courts were called on to do legally what otherwise would have been done illegally.
Today we are better educated, and hence more complicated. But the corners cut in securitizing mortgages in the first half dozen years of this century prove the big banks that originated those securitizations werenít a bit more honest or less greedy than Indian agents. Every court day, the scenes played out in foreclosure court in Okaloosa County prove that it takes more paper, and lots more legal procedure, but all the same things are happening now as happened to those Indians.
Imagine a hospital that needs desperately to do heart transplants in order to keep its doors open. The patients donít need that many transplants, and ordinary medical considerations donít indicate them. But the hospital needs them in order to pay dividends, and so they pay big bonuses to those who do them, and make transplants easy for the patient. Hopefully we all agree that this hospital has it backwards. The needs of the hospital are driving this ďmarket," not those of the patient.
We know now that the big banks did the same thing. They put together and sold packages of mortgages that required enormous street level borrowing to feed their system, and that while the system originally served a purpose, its profits were so enormous that securitization quickly devolved into a scheme primarily to create commission income and bank profits. Those profits were multiplied only if you and I could borrow money and mortgage real estate easily and often. To accomplish that the originators ignored borrower qualifications, loan to value ratios, honest appraisals, and we took whatever other shortcut could be devised to create more mortgages, so that the originating banks could securitize more packages, make more commissions, and declare more bonuses.
Like the hospital in my hypothetical, the mortgage market got it backwards. Mortgages were driven not by a borrowerís need to borrow money, but the lenderís need to lend it. We all thought the economy was functioning wonderfully. Now we know that our whole society confused earned income with money borrowed on real estate that we were told (and wanted to believe) was escalating in value.
I woke up this morning to an article in the New York Times about the newest lender product. It is loaning money secured by retirement income yet to be received. The retirees being solicited include military, government employees, and others. This game is probably more obvious, since those who run the game do so at usurious rates of return, and those who borrow hopefully understand they are trading away long term security.
If wishes were important, Iíd wish us to remember these lessons:
The difference between earned income and borrowed money is not always obvious, but it is always important.
Figure out something mankind needs and learn to deliver it. Reliably and better than anyone else, if you can. At some point people will know.
Understand that bad things can happen instantly and without warning. But unless you win the lottery (and you wonít) good things only happen over time, by planning and preparation.
Borrowing money for things you donít have to have is like prepping for a marathon by eating barbecue pork. Soon it wonít taste nearly so good, and when you see it again, it will be ugly. Mortgaging your property for that loan is going back for seconds before the race.
Borrow to make money. Not to spend it.
Donít ever confuse a solicitation from one of the big banks to loan you money, or to extend your credit card, or even to refinance your loan, with concern for your best interest. It is not.
Notwithstanding everything Iíve said, donít be afraid of a loan or a purchase that makes sense for both sides. Our economy will work well, but only if we follow rules, both those we ignored and those stated above.
Other than who we are with other people, our homes are the most important thing we have. Please be careful with them. Your retirement and accumulated assets are also important. There are many honest, capable professionals who can help with your decisions.
Mike Chesser is a Board Certified Real Estate Attorney with Chesser & Barr, P.A.