One Utah

Your mortgage interest rate is contractually defined, as is your car payment.  They have defined late charges if you are late or miss a payment. Generally, the charges, fees and rates on such loans are easily understood and clearly defined. Same goes for student loans.

Where the credit systems gets confusing and weird and wild is revolving credit and various forms of “consumer” credit. I read through a recent credit card offer that arrived at my house. This card, if I had taken it, offered: 9.99% on purchases, 12.99% on balance transfers and 19.99% on cash advances. Payments to this account would go first to the highest rate balances, then the lower balances. If I missed a payment or was late, the late fee was calucated based on the balance - thus the higher my balance the higher my late fees. If I missed a payment or was late, the interest rates changed - the 9.99% became 14%, the 12.99% became 18.99% and the 19.99% became an astonishing 29.99%.

That is clear enough as it goes, I suppose. However, this card came with a special introductory offer - zero percent interest on balance transfers through June, 2009. Sort of. See to get the zero percent interest through June of next year, I had to make at least $100 in purchases in the first 90 days I had the card. If I didn’t, the balance transfer offer was good through March of next year. That’s still a good enough deal to consider. But, by requiring the $100 purchase, the card company was in essence hoping I’d either miss that point and start paying interest earlier, or that I’d make the purchase and pay interest on it for approximately a year. Since the card offer included a statement that I was preapproved for a $10,000 credit limit, the card company was either betting I had large enough balances to transfer that I’d require that limit and thus pay them interest for a year on at least $100 dollars or they were hoping I’d have a small balance to transfer and use the card a lot.

Requiring the purchase on the card is a smar move - it gets me used to using that card for purchases. It primes me to make more purchases.

These kinds of offers are far from uncommon - almost any form of consumer credit offers a variety of deals, interest rates and such.

They’re not always easy to understand, you have to actually read the fine print.

The mortgage meltdown that has threatened to swamp our financial industry came about because mortgage lenders were playing precisely these kinds of games with debtors. Now you can argue that people shouldn’t have taken these loans, they should have “known” better. But if the guy in the expensive suit at the mortgage company is telling you its going to be okay, you’re probably going to believe him. If the real estate agent and the guy at the mortgage company both tell you, “Look, we know its a risk but if you buy this house it’s going to increase in value and in three years when your mortgage stops being interest only, you’ll be able to refinance into a traditional mortgage, we see it all the time,” you’re going to believe them.

The mortgage officer and the real estate agent weren’t necessarily being deliberately deceptive - they bought into the own rhetoric. They knew these deals on houses and mortgages weren’t “good” weren’t “traditional” and were risky. They were betting the house - well not their houses! - on the “fact” that housing prices have not declined in the US since the Great Depression. Sure there were some slow housing markets before but house prices and values always go up. Right?

Lots and lots of folks who probably should not have gotten mortgages were getting them. They were sold the dream of home ownership and they bought it, lock stock and barrel. And when their house didn’t appreciate in value, when they couldn’t refinance before their interest rate reset or their home mortgage went from interest only and their payments suddenly tripled, they faced dire choices.

I’ve read articles about large chunks of developments that are filled with “trashers” - houses that are vacant, filled the now departed owners belongings. The owners have just walked away and left their trash. Noboby lives there to do yard work or other maintenance and the houses have broken windows and missing shingles and . . . you get the idea.

It’s rare to see the connections - immediate and real - between an industry gone wild, using every tool they have to get a commission today and broken dreams of individual consumers and the national economy. The lesson we need to take is not just caveat emptor but that we need a good, consistent system of regulation, one enforced in consistent ways. The financial industry has been allowed to run wild and we’re reaping the bitter harvest of those wild oats.

This entry was posted Sunday, March 16th, 2008 at 6:52 am and is filed under This Blog. Both comments and pings are currently closed.