Ignorance is Anything but Bliss for Many Borrowers

I can’t resist sharing MMI: Staying Ignorant in Five Easy Steps from Calculated Risk which exposes the numerous holes in a recent MarketWatch report about qualifying for a mortgage in today’s credit crisis (and it is a crisis) which begins like this:

You still may qualify for a mortgage, regardless of a shaky credit market. But you need to know the ropes because many lenders have tightened standards. So what should you do if you’re buying a home today or you need to refinance?

The MarketWatch piece then goes on to misinform it’s readers as to exactly what they should do to secure financing during our current credit crunch.  There is no doubt that many prospective homeowners out there are financially sound and savvy enough to purchase property in a tumultuous market.  Having said that, many are NOT and never were.  This comment from the Calculated Risk piece sheds some additional light on the problems with our mortgage markets.  Commenter "sniglet" pens the following:

I don’t blame borrowers (either of the consumer or corporate variety) from making unwise decisions to expand their debts during the boom. If people are willing to lend you money at ridiculously low rates, with little protection (e.g. covenant "lite" bonds), then you’d may as well take as much as you can get…

If asset prices continue expanding you will get rich. If asset prices fall, you just let the lender possess the assets used for collateral and walk away. This is what many struggling home-owners are doing right now.

In fact, so long as money is easy to borrow it is almost silly to put your own capital at risk. Why make a down-payment on a house that could go down in value? Instead, let the lender take all the risk and keep your money elsewhere.

A black mark on your credit rating is a small price to pay for not having to have a dead asset (e.g. a depreciating house) on your balance sheet.

Don’t blame borrowers for getting in over there heads?  Let the lender possess the collateral?  A black mark on your credit rating…?  Sniglet really believes that if you got in over your head that it’s the bank or mortgage broker’s fault.  Hell, s/he probably thinks the real estate agent should be held accountable too.  Just not the actual borrower.

Take a look at Calculated Risk’s critique of this ridiculous Marketwatch piece.  Here’s a quick synopsis:

MarketWatch Says:  Pay down credit balances. That will make you look less risky and might help your credit score, suggests Tom Quinn, vice president of scoring for Fair Isaac Corp., Minneapolis. If you have good credit, it may be possible to raise your credit score by asking existing creditors to raise your credit limits. But ask the lender not to pull your credit report to do it. Credit-report inquiries or deteriorating credit can lower credit scores.

Calculated Risk Wisely Says:  …If your credit card debt is trivial, so is this advice. And for the love of God, can we stop talking about what makes you "look risky"? What, "risky" is just some subjective attribute, like "fat in horizontal stripes," that can be fixed by changing your outfit? After all this turmoil, we’re still making people think that it’s just a matter of appearances and easy steps.

MarketWatch Says:  Get a copy of your credit report from each of the three major credit bureaus. Fix errors and get as much adverse information removed as possible. You’re entitled to one free credit report annually from each credit bureau at www.annualcreditreport.com. Read six steps to correct your credit report.

Calculated Risk Wisely Says: …You get bonus points if you ask yourself how "fixing errors" became code, during the boom, for fraudulent "credit repair." You get double bonus points for asking how some people became able, easily and without cognitive dissonance, to tell themselves that their debt problems were "all a big mistake."

MarketWatch Says:  Check licenses of lenders you’re considering. This may not be easy because state licensing requirements vary by state and lender. Banks and thrifts can be checked out at www.fdic.gov by clicking on "Institution Directory."

Calculated Risk Wisely Says:  Do you yet know whether all depository lenders actually require state licenses? I didn’t think so. Do you yet know how many imploded, bankrupt, and criminally-investigated lenders so far this year had perfectly valid licenses? I didn’t think so.

MarketWatch Says:  Shop several lenders. Don’t assume if you get one quote of an unusually high interest rate, all will be high. Negotiate lower rates and seek removal of unnecessary fees.

Calculated Risk Wisely Says:  Do you know what "unusual" is? Do you know what fees are "necessary"? Please analyze and evaluate your "negotiating" strength in a credit crunch. You can use the back of this paper if you need more space. (Hint: it’s called a "credit crunch" when you have no position from which to negotiate because you need a loan more than the lender needs to make one.)

MarketWatch Says:  Consider that interest rates and terms may change daily. Also, a low interest rate could mean more upfront points or added fees. Get all pricing information in writing before obtaining a written commitment for your loan. Get a commitment letter directly from the lender who’s financing the mortgage, which may be different from the loan originator.

Calculated Risk Wisely Says: …Much, much more to the point is that a "commitment letter" commits the lender to lend at the specified terms. It does not commit the borrower to borrow. You are not obligated for diddlysquat until you sign something with "Note" at the top and "I promise to pay" somewhere in the first line. We have heard story after story about people who didn’t think they could "back out" when they were confronted with closing documents that didn’t look right. Helpful advice might involve explaining that issue.

Ignorance is ignorance and doesn’t excuse a borrower from getting in over his/her head. So when Thomas Gray penned Ode on a Distant Prospect of Eton College he said:

To each his sufferings: all are men,
Condemn’d alike to groan—
The tender for another’s pain,
Th’ unfeeling for his own.
Yet, ah! why should they know their fate,
Since sorrow never comes too late,
And happiness too swiftly flies?
Thought would destroy their Paradise.
No more;—where ignorance is bliss,
‘Tis folly to be wise.

So in this case of uninformed or under-informed borrowers, it’s plainly obvious that ignorance is definitely not bliss.   

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