Issue #5, Summer 2007

Unsafe at Any Rate

If it’s good enough for microwaves, it’s good enough for mortgages. Why we need a Financial Product Safety Commission.

Elizabeth Warren

Even worse, consumers wary of creditor tricks may look for help, only to rush headlong into the waiting arms of someone else who will fleece them–and then hand them over to the creditors for further fleecing. In the mortgage market, for example, consumers may respond to advertisements for “a friend to help you find the best possible mortgage,” “someone on your side,” and “access to thousands of mortgages with a single phone call–do all your comparison shopping here.” When they call a mortgage broker, they may believe they will receive wise advice that will guide them through a dangerous thicket. Some mortgage brokers will do just that. But consumers are just as likely to encounter a broker who is working only for himself, taking what amounts to a bribe from a mortgage company to steer a family into a higher-priced mortgage than it could qualify for, all the while assuring the family that this is the best possible deal. For example, a family that might qualify for a 6.5 percent fixed-rate, 30-year mortgage could easily end up with a 9.5 percent mortgage because the broker can pocket a fee (what the industry calls a “yield service premium,” or YSP) from the mortgage company to place the higher-priced loan. High YSPs helped drive the wild selling that led to the recent meltdown in the subprime mortgage market.

Despite the characterization of YSPs by one Fannie Mae vice president as “lender kickbacks,” the practice of taking these fees is legal. Under pressure from the mortgage-broker industry, Congress and the regulatory agencies have generally approved of YSPs. In fact, mortgage brokers face few regulatory restrictions. It is no surprise, then, that mortgage brokers originate more than half of all mortgage loans, particularly at the low-end of the credit market. YSPs are present in 85 to 90 percent of subprime mortgages, which implies that brokers are needlessly pushing clients into more expensive products. And the costs are staggering: Fannie Mae estimates that fully 50 percent of those who were sold ruinous subprime mortgages would have qualified for prime-rate loans. A study by the Department of Housing and Urban Development revealed that one in nine middle-income families (and one in 14 upper-income families) who refinanced a home mortgage ended up with a high-fee, high-interest subprime mortgage. Of course, YSPs are not confined to subprime mortgages. Pushing a family who qualifies for a 6.5 percent loan into a 9.5 percent loan and pocketing the difference will cost the family tens of thousands of dollars, but it will not show up in anyone’s statistics on sub-prime lending.

Other creditors have their own techniques for fleecing borrowers. Payday lenders offer consumers a friendly hand when they are short of cash. But hidden in the tangle of disclosures is a staggering interest rate. For example, buried in a page of disclosures for one lender (rather than on the fee page, where the customer might expect to see it) was the note that the interest rate on the offered loan was 485.450 percent. For some families, the rates run even higher. In transactions recently documented by the Center on Responsible Lending, a $300 loan cost one family $2,700, while another borrowed $400, paid back $3,000, and was being hounded by the payday lender for $1,200 per month when they gave up and filed for bankruptcy. In total, the cost to American families of payday lending is estimated to be $4.2 billion a year. The Department of Defense identified payday lending as such a serious problem for those in the military that it determined the industry “undermines military readiness.” In fact, the practices were so outrageous that Congress banned all companies from charging military people more than 36 percent interest. This change in the law will protect military families from payday lenders, but it will leave all other families subject to the same predatory practices.

For some, Shakespeare’s injunction that “neither a borrower nor a lender be” seems to be good policy. Just stay away from all debt and avoid the trouble. But no one takes that position with tangible consumer goods. No one advocates that people who don’t want their homes burned down should stay away from toasters or that those who don’t want their fingers and toes cut off should give up mowing the lawn. Instead, product safety standards set the floor for all consumer products, and an active, competitive market revolves around the features consumers can see, such as price or convenience or, in some cases, even greater safety. To say that credit markets should follow a caveat emptor model is to ignore the success of the consumer goods market–and the pain inflicted by dangerous credit products.

Indeed, the pain imposed by a dangerous credit product is even more insidious than that inflicted by a malfunctioning kitchen appliance. If toasters are dangerous, they may burn down the homes of rich people or poor people, college graduates or high-school dropouts. But credit products are not nearly so egalitarian. Wealthy families can ignore the tricks and traps associated with credit card debt, secure in the knowledge that they won’t need to turn to credit to get through a rough patch. Their savings will protect them from medical expenses that exceed their insurance coverage or the effects of an unexpected car repair; credit cards are little more than a matter of convenience. Working- and middle-class families are far less insulated. For the family who lives closer to the economic margin, a credit card with an interest rate that unexpectedly escalates to 29.99 percent or misplaced trust in a broker who recommends a high-priced mortgage can push a family into a downward economic spiral from which it may never recover.

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Issue #5, Summer 2007
 
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Jim Flanagan's Response You Missed the Mark:

To compare a mortgage, an instrument used to purchase, secure and collateralize a piece of Real Estate, one of the main avenues used to create and build long term wealth in a short time, running neck and neck only with the stock market for vehicles to create millionaires and billionaires. It is the only way someone with nothing can secure the American Dream and enter an arena with so much potential. When a college degree, the school you went to and it’s ALUMNI, no longer matter. The educationally challenged home schooled degree of hard knocks is OK. They can play they are now in the game and on the field and can compete. I fail to see how this matches up against a broken toaster that can burn down a house, building, and block. Also kill yourself the kids and the neighbors, maim and/or steal unlimited lives or the microwave that can cook your brain rendering you, your college degree’s life experience useless. The fact that there is no age limit on shopping in the mall, online, catalogs, mailers and the HOME Shopping Network’s, minors can buy and CHILDREN whether supervised or left home alone can and would play with and injure or kill themselves and/or countless others, to a mortgage payment to a subprime lender from a family that was paying 1,500.00 a month RENT supporting his Real Estate investor landlord and now is paying equal to or LESS for his own home which he just bought, that he now gets his tax shelter on his mortgage interest, closing costs, home structure depreciation and appreciation in value driving up his net worth and are now getting a shot at the American Dream of home ownership and success. Because, the subprime bank (of private investors) gave him the money because the conventional lenders would not take the risk with the odds being too great. Tell that family that a subprime mortgage and a broken toaster made in and imported from China are the same. Even if he lost the home in FORECLOSURE, if it was the apartment, he did not own, it would have been called GETTING EVICTED either way the family is in a shelter no one really cares if he got there from an eviction with a subprime lender taking the investors payment, collecting the rent to repay his subprime mortgage on the same home 2 scenarios. Why is it on one we care and one no one hears about? This is nothing more than an opportunity for a platform to promote a future political adgenda and you the author, with a degree from “The Most Prestigious University in the entire World, “HARVARD LAW SCHOOL” an Ivy League school and you just drafted an article in laymen terms with a catch phrase of a crooked politician, meant for the masses of the laymen educationally challenged and threw statistics in there that they wouldn't have read anyway according to the credit card portion, I don’t get it. You insult the intelligence of your audience, which could use solid advice from someone of your caliber and print non-sense. You referred to scare tactics and yet you use the same ploy it in your headline with big bold font. You learned researching the subprime thieves. You want to protect the consumer put a CAP on the payments and Rate spikes. Allow the borrower the chance to be forgiven a grace period when forgetting the anniversary date of the payment adjustment, notify them 6 months prior so they can refinance the mortgage out. Sell the info to other banks so they can call the guy with offers and get him out of trouble before the credit scores drop. Because now there are no more sub prime lenders left, OPTIONS are gone. At least they had the shot, sometimes people have to be given the opportunity to fail. AS for the credit card portion, why it was there this was a mortgage slogan and topic and you should have saved it for another article the credit cards are a totaly different animal. Maybe the schools should have educated kids on real life like business, real estate, money and marriage years ago instead of pumping out real world morons and illiterates like cattle that can’t balance a check book or read financial statement. In the end that’s all the ANY Lender Cares about anyway isn’t it. Someone with your knowledge and background can really make a difference. You sold yourself and your readers short today. That topic could have had some serious impact, articulated properly, by you Professor. With an article like this who would you recommend, running this committee, which blundering pile of ineptitude would volunteer and generously offer their 2 cents worth of their 1 cent opinions, without having a pulse on how this really started and how to fix it without directly crossing lines into other agencies and free markets. Remember always start with the end in mind and from the local ranks to complicate things will be.......

The Financial Product Safety Commission LOL

P.S. Aren't they still selling bootlegs and knockoffs all over

Thats because rules restrict the good guys and the bad guys never played by them in the first place

Forgive me if I was harsh.

Professionally Yours,

Mr. Jim Flanagan

Jun 23, 2007, 7:30 PM
Nancy Seats:

Thank you for this outstanding analysis of the financial markets industry. Everyone in the nation should read it, but most partiularly, CONGRESS.



One thing that you may not be aware of -- the product safety commission does an outstanding job on the issues that they cover, but did you realize that HOUSES are NOT coverd by anyone regarding the safe and sound construction of them? Houses are considered real estate, NOT a product. CRAZY?? You bet!



Today Consumer Reports says the 17% of new homes built each year have two or more serious defects yet there is NO consumer protection for the largest purchase a family ever makes.



SO we not only have predatory/fraudulent lending leading to foreclosure, we also have serious structural defects. Most builders have binding mandatory arbitration clauses naming the arbitration service that must be used -- builders are repeat users and arbitrators who are on the list to choose from know where their bread is buttered. Not only that homeowners who go through this kangaroo court nearly always get a gag order so that they can't warn others about the bad builder OR the horror of arbitration.



Thanks again for writing this paper. I am sending it to everyone I know.



Sep 9, 2007, 1:30 AM
Diane R:

Thank you. Excellent idea - I fully support it.

Mar 24, 2009, 3:59 PM
Diane Richardson:

Thank you. Excellent idea - I fully support it.

Mar 24, 2009, 4:01 PM
JTFaraday:

"President Obama appointed Elizabeth Warren to establish the new Consumer Financial Protection Bureau–“€”an agency that Warren first proposed in the Summer 2007 issue of Democracy.



The creation of the new bureau was a key provision of the financial regulatory reform bill that President Obama signed into law this summer. Warren will serve as Assistant to the President and Special Advisor to the Secretary of the Treasury to get the new agency started."



That's all very well and good, but why are we congratulating ourselves that



1). Warren is merely advisor and not official head of the agency?



2). this alleged "consumer protection agency" is housed internally at the federal reserve BANK?



3). you're so far behind the curve that "Democracy: A Journal of Ideas" is effectively lying to the public?



http://www.nakedcapitalism.com/2010/09/elizabeth-warren-on-way-to-being-sidelined-as-head-of-consumer-protection-agency-relegated-to-advisor-role.html



I'm taking a very long term view here. The 2010 election is over and you're coming out of it looking like a delegitimized tool to me.

Sep 20, 2010, 2:07 PM
Ninaannuary:

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Mar 17, 2011, 1:41 PM
Dr. Paul G. Scheurer:

Discussions as to who it right or wrong about anything is a waste of ones time.
For example, there is an ongoing lawsuit which concerns the restoration of our NE fishery. What is important is not the lawsuit but How the fishery is to be restored - the solution to the problem, not the political solution but the real solution based on scientific evidence, a real plan of action that promises to succeed if followed with diligence.

In all the years I have been reading the Gloucester times, I have not read one comment as to any solid scientific plan to restore the fishery.
I can shake one our of my sleave. Am I so different from anyone else when it comes to doing simple things which make sense.

Worse, no one seems willing to come together and discuss the problem - our problems.

Mar 30, 2011, 5:57 PM
Pat:

It is all but impossible today to identify a legitimate creditor because of the changing nature of business, and the "identity hats" worn by "instant companies, and fly-by-nights" that are here today and gone tomorrow."

40% of companies in the top rankings of the Fortune 500 in 2000 were not there in 2010, as reported by business analysts.

Who's kidding whom?

May 24, 2011, 9:53 AM
humanetigor:

Road to the Truth can be found at the following address: truenewworld.com
(attention, it is not the ad of the site - it is the ad of the Truth).

Jun 22, 2011, 1:25 AM

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