"The fine print giveth, and the fine print taketh away."
These lyrics from a song popular in the 1940s ruefully acknowledge that E-Z credit can be the answer your prayers one day and leave you up a creek the next.
A press conference held in Sacramento today, November 29, 2007 reminded me of this homespun truth, celebrated in song and recognized even at the very dawn of modern consumer finance. But sixty years later, not everyone has gotten the message.
It's impossible to critique the "mortgage mess" objectively without sounding like a cynic or an old curmudgeon or a pawn of laissez-faire capitalism, which is why the media and politicians don't, and why they've piled onto this issue like a loose ball in a close Super Bowl. I don't doubt that some, and perhaps many, of the borrowers now in trouble were lied to and taken advantage of. But I also don't doubt that some, and perhaps many, of those borrowers are unindicted co-conspirators in their own undoing, victims of self-deception and wishful thinking.
When I moralize like this I worry, because it sounds like the cheap sermonizing on this topic you'll find on the 'net. But I worry even more when a politician gets self-righteous and tells the electorate "we're changing the way mortgages are done in California". Because, inevitably, elected leaders playing to the grandstands will make a bad situation worse. Inevitably, the politically expedient chickens of 2007 will come home to roost, and sooner rather than later. Eventually, even the policy makers and public-interest groups will understand that scapegoating and feel-good fixes only raised borrowing costs and returned the traditionally under-served consumer, so recently and briefly over-served, to the ranks of the under-served. The only silver lining in this time-honored process is that by then the pols and reporters will be grazing on other issues du jure and the pendulum will be allowed to quietly swing back to some midpoint, but not before the damage is done and political careers advanced.
I worry even more when a politician presents us with a victim who says, "I wish someone had told me my mortgage payment would go up a thousand a month". Because somewhere in the fine print it did say, no, not that her mortgage payment would go up a thousand a month—no one knew the exact amount—but that after a stated period, that low low mortgage payment would adjust by a margin of X per cent over a specified index interest rate. If this sounds too convoluted for the average consumer to comprehend, the Truth in Lending Act says that the paperwork for every loan must clearly state the maximum interest rate possible during the life of that loan.
Yes, fine print sucks. And no, no one specifically told this borrower how much her payment would go up. But her situation reminds me of a fast one my stock brokerage tried to pull a few years ago, something that looked awfully good until I did my due diligence, exercised whatever common sense I have, acted like a financial services consumer at least partially in control of his destiny, broke down and actually read the fine print.
If you own mutual funds, you're probably familiar with the idea that the ups and downs of the various stock market sectors can leave your portfolio over-invested in some and under-invested in others. But few of us track our funds obsessively (at least I don't) and few have the inclination or understanding to rebalance assets (again, I don't).
"So why not let us do it for you", my brokerage asked helpfully, "for a nominal fee?". "Sounds great", I said, "but, no, I didn't just ride into town on a load of turnips. So before I sign on the dotted line, let me look at the funds you're offering in your helpful no-brainer low-cost asset rebalancing program".
So I did, and an instructive hour or so at Morningstar's Web site told me that in the star-spangled name of no-brainer low-cost asset rebalancing my brokerage would ease me out of the top-performing funds my broker, a great guy even though he can't always remember my name, had put me in, and throw me in a pool of funds with a long history of under-performing both their peers and the market.
And, being the cynic and old curmudgeon I am, it struck me that loser funds like these must be hard for my brokerage to sell unless they're skillfully packaged—like as a helpful no-brainer low-cost asset rebalancing program, maybe?
What's that saying about free lunches?
There may be two lessons here.
First, the financial services industry isn't necessarily your friend. Not many industries are. Unless you're willing, indeed anxious, to look past a few things.
Second, the answer to "I wish someone had told me" is sometimes "they did, in their own round-about and even faintly sleazy way. You just didn't listen."