Saturday, April 7, 2007

The Fine Print

A coalition of various American civil rights groups, representing minorities and the poor, are asking mortgage lenders to declare a moratorium on foreclosures for six months. The lenders, servicers and investors who hold these loans should agree to this, so the logic goes, because it was their reckless lending patterns that got homebuyers into trouble in the first place. (I would submit that they're being "diplomatic" in their use of the term "reckless." I suspect that they would rather have just come out and said "predatory.")

I was listening to a story about the sub-prime meltdown on NPR some days ago, and they were interviewing an elderly woman who'd gotten herself into trouble by refinancing her home to help pay off the debts that her husband left after his death. During the interview, Ms. Halliburton says that she took their word for what her payments were going to be, and what they told her wound up being much less than what they actually turned out to be. Her lawyer says that it's unfair for people to expect that she could have figured this out from reading the loan documents.

What's missing from these narratives is what people can do to protect themselves from situations like this. And it's really very simple. Don't sign anything that you haven't read and/or don't understand. If you can't understand it, find someone who can. Don't let anyone hurry you into ignoring the first two suggestions. And lastly, don't take people at face value without a good reason. The critics are right to point out that many of these sub-prime mortgage vehicles were very complicated - too much so for a layperson to figure out. But now that things are starting to go south on people, it seems easy enough to understand, and people are finding the resources to help them parse out these schemes. This is something that we should expect people to do before they really get into hot water.

If people refuse to sign onto agreements that they don't feel they understand and insist on finding competent help, then the complicated agreements become harder to sell, and thus more expensive to create, relative to the overall return. In promoting, if not financial literacy, financial caution, we can set things up so that deliberately opaque and/or deceptive practices are much rarer and more easily seen in advance. We have to stop looking at this as some sort of luxury, and more as the price of doing business.

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