By: Christopher M. Barra
Prodded by government regulation, inept financial management at lending institutions, combined with irresponsibility of overzealous borrowers, has our country spiraling toward credit failure. Those teaser mortgage variable rates looked so good at three and four percent. The question was: “Why shouldn’t I do that and save money for the next few years at least?”
As a tax and investment advisor, my answer to clients was always: “Sure, the adjustable rates are lower now, but interest rates are cyclical and the higher rate will kick in hard. When it does, unless you are making significantly more money, you won’t be able to easily afford it. In addition if your property value should decline then you will have no way to refinance because you won’t have enough equity. It doesn’t take a financial genius to know that the real estate roller coaster ride doesn’t only go up. Even if you do have the equity, the rates will increase and be considerably higher than they are now, and so still you will probably pay more later.”
For these mortgages to work for the borrower, and for him to be able to live the same lifestyle, he must earn more money in the near future when time triggers that higher rate. This should come as no surprise as the loan clearly states it will cost more in a few years. If you had one of these loans and now claim you didn’t know that, I truly hope you haven’t parented any children.
If we know we can handle the fixed rate now, all things being equal, we will very likely be able to do so in the future. We won’t have to worry about income increasing, or property value decline because we won’t be forced to have to try to refinance. We are safe.
So, my clients bit their tongues, applied this sound logic and wisdom, and accepted the slightly higher fixed rate. Enjoying historically low rates in comparison to past decades took some of the sting out of the decision. Sure, we paid a little more over the past few years than many others did for the same money, but choosing stability over unpredictability seemed like sound financial logic. Yes, we were doing the right thing.
Or were we?
Understanding government’s capacity for unlimited interference has become critical to investment management thought process. Like it or not, we have to try to figure out what the government is likely to do, and then act in a way that anticipates the financial result of that action. From Federal Reserve policy to the anticipation of yet to be passed tax or now “bailout” legislation, we try to predict what factors will affect the viability of our personal financial decisions. It isn’t just balance sheets, market projections and logic these days.
A few years have passed since the lending frenzy was in full swing, and now we are in a mortgage, credit and real estate crisis nearing biblical proportions. This transpired not because of unforeseen circumstance only a psychic could foretell, but simply due to the accumulation of poor, government-encouraged individual decision-making, one by one on a massive scale.
For recognizing the possible danger individually, are those of us who suggested and employed higher fixed rates now considered brilliant economic strategists? Are we financial wizards? Divinely guided prophets deserving of the respect and adoration of all? After all, we were right.
No, we’re the idiots who didn’t realize what role the government now considers its domain: to come to the rescue of the stupid and the irresponsible; to reward those making bad decisions; those who fail; to barely tolerate the successful and sensible, and to once again bail out the reckless and negligent with other people’s money. Our money.
Those of us who were prudent must now subsidize below market interest rate loans for those who took the easier way. They are now about to be rewarded for their bad decision making with either a moratorium on foreclosure, a lowering of their rates, a delay in the agreed upon increase in rate, or a reduction in principal balance due. We, who were prudent and smart will continue to pay our fixed higher rate loans without even a “thank you” and also be asked to absorb part of their balances as well.
I take this opportunity to apologize to all my clients for my lack of insight and error in judgment. I should have realized that the government would again favor the irresponsible. They always do. Fool me once, shame on you; fool me twice, shame on me; fool me three times, – that would be me again, Fool me again, my fault. Fool me yet another time, OK – I am beginning to get it. You can stop hitting me on the head now with that financial hammer.
My epiphany, now complete, I have made what I consider to be a reasonable financial decisions based on logic gleaned from historical empirical evidence. I have therefore chosen a couple of companies into which to invest. My criteria for selection is a little different these days, but times change. In order to be successful in the Bizarro Economic World we must employ Bizarro Financial Analytical techniques.
I now look for companies hopelessly in debt, with negative earnings. They must have an unreasonable unionized labor force, unwilling to compromise or seriously renegotiate, and a long term continually declining market share. Their future must be bleak and of course, they must be run by chairmen with extraordinarily poor financial management skills and insight.
Ford and GM should be a good bet.
Think I am kidding?