Saturday, March 3, 2007

Rant: ARMs and Due-Diligence

The following post is a YFNN rant. You may find it offensive, crude or just plain wrong. Get over it.

due diligence
1. the care that a prudent person might be expected to exercise in the examination and evaluation of risks affecting a business transaction

As I putt around the house on the weekends, I listen to the news of the week, either via XM radio or downloaded podcast on my iPod. Today, I happened to be listening to XM Radio, where a discussion was taking place regarding the number of foreclosures in today's housing market. The majority of the talk was regarding the big, bad mortgage lenders that provided adjustable-rate mortgages to folks looking to buy a house. These adjustable-rate mortgages, or ARMs, most of them anyway, are past their fixed periods (1-5 years typically), and are now, as their name suggests, adjusting. Wow, who'd a thunk it?

Apparently, there's a significant amount of people out there that are getting burned by these loans, which, in my opinion, is largely due to their own ignorance. This radio program actually had a soundbite of someone that said their payment doubled from a manageable $1200 a month to a payment of $2400 a month. They went on to say that they "couldn't afford the payments anymore" and "didn't realize that their payment would change." Several others were quick to jump on board and blame the lenders. Quotes like "I didn't know what I was signing," and "I never thought an adjustment would make my payment increase," were abundant.

I have a couple of points to make to these people regarding this, all of them pretty well summed up with the statements "Why did you not think or do research?" or "Why were you so lazy?"

First of all, at the time the vast majority of these loans were written, mortgage interest rates were at all-time lows. Let me say that again and really make sure that I'm absolutely crystal-clear:

All. Time. Lows.

If mortgage rates were at all-time lows, which direction did you think the variable interest rates would go? Maybe, um, up? I can understand that there are situations where ARMs are smart loans, but in nine loans out of ten, why would you take that risk when fixed rates were so low? I just don't get it.

I guess it really comes down to people buying into more house than they could really afford, which is stupid. If the only way you could afford the payments on the house was to go with an ARM, or worse, an interest-only loan, it's gotta be a pretty big red flag that you're almost certainly buying way more house than you can afford.

Second, I have absolutely zero sympathy for the people that claim ignorance and blame the lender in these situations. One of my number one rules for investing is to not get involved with an investment that I do not understand, and I think that rule definitely applies here. It's not like the lenders are hiding the information from the borrower. Every loan has their conditions clearly stated, and the information is easily available via the internet, bankers, or others. It is the responsibility of the borrower to perform due diligence and fully understand what you're getting into. If you need to, get a lawyer or a non-drunk friend (preferably someone that can read) to look it over and explain it to you. Claiming you didn't know what you were signing is yet another way of blaming someone else for your irresponsibility. It's your duty to understand it! Nobody is forcing your hand to scrawl your name. If you don't get it, don't sign it!

I guess what this really boils down to is that I'm just tired of people not taking responsibility for themselves, which has certainly become a disappointing trend in recent times.

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