Editorial: Castles Made Of Sand
What's missing from all the discussion, prognostication and panic about the state and the nation's current foreclosure mess is any willingness to admit that many erstwhile homeowners failed to recognize they were being defrauded by unscrupulous lenders that led them into a wildly inflated real estate market presented as the American dream.
If, as the multi-state Foreclosure Pre-vention Working Group recently concluded, "a significant percentage of subprime adjustable rate loans are delinquent before they experience payment shock from their first adjustment," then the problem that has led to so many foreclosures in Massachusetts and across the nation is slightly different than first perceived. For sure, those adjustable rates can cause pain.
But the multi-state group's analysis shows that many borrowers were having difficulties paying their mortgages within the first year or two of the loan, long before any ARMs hit borrowers with double-digit increases.
A Pair Of Problems
This reinforces what everyone already knows. It takes two to tango when it comes to home loans - both unscrupulous lenders and an ill-informed public share the responsibility for the current mess, and need to feel some heat from state regulators.
The state does sponsor financial literacy initiatives, and some big city government entities offer first-time homebuyer sessions, but those efforts have been trumped by the "we'll do the homework for you" pitch from mortgage brokers. Well-informed borrowers could have avoided the types of risky loans being pushed by brokers and lenders over the last five years. However, a huge percentage of borrowers not only fail to understand the intricacies of mortgage lending, but have very little understanding of the basics.
The average person will not buy many homes in a lifetime. A mortgage lender, by contrast, will write thousands of loans over the course of his or her career, and mortgage brokers help connect thousands of homebuyers with those loans.
The brokers and lenders are at an advantage, and it's simply too easy for potential borrowers to presume their best interests are being protected by the expertise of those brokers and lenders.
So, the state has a two-pronged job on its hands - it must help educate the public and curb unscrupulous lenders who make loans with no real assessment of the borrower's ability to pay.
To that end, the state must be comprehensive in educating the public on financial literacy, specifically as it relates to buying a home. That means starting when people are young. This can include grants to established banks - that can prove they avoid risky loans - to run programs at local schools.
We also need to recognize that foreclosure is a basic and necessary part of the real estate market. It's been easy over the last year or so to see that something had gone wrong with that process, however. The number of foreclosures in Massachusetts spiked 150 percent in 2007, as borrowers screamed that they'd been had. And the news isn't getting any better for Massachusetts, where most ARMs were written in the third- and-fourth quarters of 2006, and haven't yet hit their first "adjustment."
Along with the AG's office, we agree with the Foreclosure Prevention Working Group's conclusion that mortgage fraud and weak underwriting has been a greater factor in the ongoing foreclosure plague than ARMs themselves. We also agree that the state must act quickly to sniff out mortgage fraud and help homeowners who have fallen victim to it.
However, we think there's something missing from the report, and from most discussions on the foreclosure topic: a call for greater financial literacy, sophistication and savvy on the part of all citizens. That call should be led by the state as part of its responsibility to protect consumers. And it should hopefully provide something else that the public, the mortgage industry and the government have been missing for the past five years: a little common sense.
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