Ron Hart Columns: Sub-prime is not sublime or you can't fix stupid |
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Sub-prime is not sublime or you can't fix stupid
August 11, 2007 - Walton Sun
By Ron Hart
Normally, I get paid for financial advice, or I am told to leave the Waffle House by the manager, but either way, I have to speak up about the topic of "sub-prime mortgages." Apparently many Americans are now trapped in a loan made on a house that they could not afford by a lender who probably knew it.
During the housing cycle that we just completed, rates were low, values were rising and many of us decided to use our home as a piggy bank, borrowing on it like Congress during an all night pork barrel fest.
Unfortunately, many individuals who saw real estate values go up started chasing the market at the wrong time – the end.
I knew we had reached a classic market top when I started hearing from pretty smart folks that they were flipping condos in Florida. Well, it was a game of musical chairs, and the music stopped, as it always does.
And, as Warren Buffett, the great American investor, once said of frothy markets, "Only when the tide goes out do you discover who's been swimming naked."
In the last few years, with home equity lenders proliferating, many like to choose their home lender based solely on which one has the best dancing Internet ad. A prudent decision on the biggest investment of most Americans' lives is best not done that way.
Our economic fate is tied together, and we Americans often have to pay for the mistakes of the badly informed.
As the Democratic Congress will make it abundantly clear, no stupid individual who plans poorly for himself should be ever held accountable, if he or she is of the demographic that votes for them.
So, the rhetoric of bailing out individuals who have been caught in an ill-conceived mortgage has already begun.
As a free market capitalist, I believe that nothing could be worse for us long-term. The only thing that Congress should do is ensure that lenders are honest when they push a loan on a borrower.
Of late, the market in sub prime mortgages had become a Wild West of unregulated trickery, in which unscrupulous lenders preyed on those who do not do well in math and reading – especially when it comes in fi ne print – and who were basically blinded by greed. The credit markets are repricing debt values now.
Education in what can happen to you, and yes, bankruptcies, are a natural and needed result of any excess. Pain is an excellent teacher. And since few borrow from their local banker anymore, they have no place to go to plead their case on working out modifi ed terms. Loans are sold now to faceless pools of mortgages that simply come get your house when you do not pay.
In a more noble view, I will remind you of the great economist Adam Smith who expressed his views on this subject more than 200 years ago in his book, "The Theory of Moral Sentiment" (the precursor to his seminal work, "The Wealth of Nations"). He began his book with a question of sorts, posed in a manner to make us think just how intertwined our economic fates are: "How selfi sh so ever man may be supposed, there are evidently some principles in his nature, which inherent him in the fortune of others, and render their happiness necessary to his, though he derives nothing from it."
In short, many have more house than they need, financed at values well above reality.
Trees do not grow to the sky, and there are going to be times of ups and downs in every market. Capital markets allocate money remarkably well over time and have amazing self-correcting mechanisms built in. When left unfettered by populist politicians, capitalism does a great job of bringing equilibrium to investments and allows the most prudent to do well.
There is an odd and perverse human inclination to make easy things difficult. Just remember this: do not borrow all that any company wants to lend you, be it credit cards, car title pawn, student loans or mortgages.
Some would fi nance a tattoo if they could. Just because someone is willing to lend it to you, it does not mean you need to take it.
Even more simply put: Do not borrow what you cannot repay.
Life is much easier in the comfort of knowing that you are living within your means, saving for the future, and forgoing immediate wants for long-term goals.
Capitalism has a great way of weeding out the stupid and excesses. Let's stand by and let it work its magic.
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