Obama Compares Loans to Toasters
March 24th, 2009
Utah realtor agrees with Obama's metaphor, but believes his solution attempts to "trick Mother Nature"
by Paul Markosian
I'm a conservative Republican yet I agree whole-heartedly with ultra-liberal Obama on at least one point: irresponsible mortgage lending is similar to building a toaster that catches fire. Our new president made this analogy the other night on Leno.
Extending this analogy reveals why irresponsible lending happens at regular intervals, while shoddy toasters are a rarity.
When you buy a toaster, if it explodes in your face there's a law that says your toasters need to be safe. But when you get a credit card, or you get a mortgage, there's no law on the books that says if that explodes in your face financially, somehow you're going to be protected. President Barack Obama
During my 30-plus year real estate salesman career I've seen the wholesale abandonment of what I'll call "quality control" at least three times. If a toaster manufacturer mimicked that behavior, eliminating quality control to increase profit margins, the consequences to the manufacturer would be fires, law suits, and burnt toast. But is this negative outcome duplicated in the lending world?
Take a look: in mortgage lending quality control requires the following:
- verification of income
- job stability
- credit scores
- down payment
- a legitimate real estate appraisal
- a proper debt-to-income ratio that allows the borrower to breathe without breaking his ribs.
During periods of irresponsible lending these safeguards are eliminated, obfuscated, in some way, bypassed, creating a mortgage note which is a ticking time bomb. About a year ago, the US economy was rocked when "sub-prime" time bombs exploded in large numbers. In September of last year the magnitude of explosions increased to the point of causing a chain reaction with insurers and investors, collateral damage that had never happened before in a significant way. But it took this world-wide calamity to attract attention to mortgage lending itself. Even a cursory look at this industry reveals an amazing fact:
Irresponsible lending is intentional. Lending bosses know the riches they reap in the short-term boom markets will not be wiped out when the bubble bursts. Various insurance entities protect them including those underwritten by taxpayers. Yes, lenders lose some when their time bombs explode but they still come out way ahead in the long run.
Liberals like Obama are right when they say the incentives for these cycles of bad behavior on the part of lenders and cohorts, including unethical real estate sales people, needs to be identified and removed. So for conservatives like me it's the same old story, if any given industry can't police itself, and in the case of mortgage lending, it obviously can't, then unfortunately, Government needs to step in.
The down side is the government isn't necessarily sane either, especially when you look at what Obama calls a "stimulus package." The tragic irony is Obama's package plants more seeds that produce the same fruit. To be specific, once upon a time affordable housing meant living with your parents until you could afford a rental deposit or a downpayment. In the Christopher Dodd, Barney Frank and Obama era affordable housing means at least two bedrooms, two baths, covered parking and big government finding a way to make you, the one who demands free college education and free health care, the title holder. Sooner or later the American citizenry will wake up to the realization that you can't fool Mother Nature. Maybe this recession is bad enough to make that awakening sooner. Maybe not.