THE TRUTH ABOUT PREDATORY LENDERS.

Forty Years Ago I remember it was like yesterday. I was in a strange town that was to become my new home and I had two hundred bucks which wasn't much even forty years ago. Granted, I had a new job at $1,200 a month (equivalent to $5800 at today rates) but I had to make that money last 15 days until I got a pay check. Fortunately, I found a hole-in-the wall apartment for $75.00 and I had pretty well figured out how to make the remaining $125.00 last until payday.


Murphy's Law Strikes. One aspect of Murphy's law is Whatever can go wrong, will go wrong. About a week from payday things started to go wrong. A series of one flat tire after another told me that I was in desperate need of four new tires. The old tires were without tread and paper thin. To say that they were unsafe, even to drive to work, was an understatement. I had to have new ones at a cost of around $150.00. Even if I could make these last until pay day, I would not have enough money left after this to last another two weeks. I had to borrow enough to buy these tires.


Limited Choices. My irresponsible behavior of the last six months certainly limited my choices. My credit was poor and my employment unstable. Subtracting my liabilities from my limited assets resulted in a negative number. A typical lender wouldn't touch me. I was forced to consult a consumer finance company. They weren't enthusiastic either but they finally offered me a loan with modest payment and 33 months to pay. I had no choice but to accept at a rate in excess of 24%. Frankly, that was the best deal I ever made. It took most of the 33 months to turn my finances around but without that loan, I might not have been able to get back and forth to work in order to stabilize my life.


Not an Uncommon Situation Today. In this environment, interest rates are low but prime lenders are running scared and holding tightly to their money. Borrowers with no collateral and unstable employment are often forced to deal with some of these so-called predatory lenders just to keep food on their table and a roof over their head. Of course the first option is to find ways to meet obligations without borrowing. You can seek extra work or sell assets as a temporary solution. I have seen well-educated professionals who have taken jobs as retail sales clerks or at temporary day-labor. Remember, there is no dishonor in honest work, no matter how well educated you are. If you can't bring in some extra money, here is a list of lenders who take less qualified borrowers. They are listed in order of risk.

1. Loan Sharks. These are often members of organized crime who loan to drug addicts gamblers. Their rates can be 100% or more and their objective is to retain you as a customer for their illicit activity. These are to be avoided at all cost. If you are tempted to deal with these, make sure you have a rock-solid exit strategy. They may resort to violence to collect.


2. Payday Lenders. These loan on an anticipated pay check. Rates are extremely high and, if you become delinquent, they often will increase the loan size to pay off the current loan and interest. Their collection procedures, while non-violent, are aggressive. Again, it is preferable to have a rock-solid exit strategy before dealing with these.


3. Consumer Finance Companies. These are a step above the payday lenders. Their rates are higher than banks and their collection procedures are aggressive, still they can be a reasonable source of funds as long as you can make the payments on time. The first two lenders on this list are important to get out of your life as soon as possible; however, holding these loans to maturity and making the payments on time can be a reasonable strategy.


4. Credit Cards. Many of these are offered by major banks and competition has forced the rates to lower levels but you still need to be careful, especially if you take cash advances or make late payments. Some of these will increase your rates to 20+% if you are delinquent beyond a certain point. The problem with cash advances is that there can be fees up to 2% up-front.


5. Hard-Money Lenders. These are generally mortgage lenders who loan strictly on the value of the collateral with no value placed on the creditworthiness of the borrower. Rates may not be excessive but up-front fees and delinquency charges are substantial. Most don't employ aggressive collection procedures; however, they can be very aggressive in obtaining ownership of the collateral. Most will extend the loan if you can't pay in full at the end of the term; however, be prepared for substantial fees in the process.

This Is A Quick Survey. As you may have guessed, I am not as critical of some predatory lenders as those who would add another layer of government regulation. They do serve a need in the market place and, if the borrower is sufficiently knowledgeable to manage the risk. can be used to solve problems that may arise. The most important point is not to use them to buy things you don't really have to have. If this is the only way you can afford a certain item, it is usually preferable to delay purchase if the item. Ask yourself, if you really have to have it now or even at all. In the long run, utilizing this type of financing will detract, not add, to your standard of living.

TROUBLE IN PARADISE?

Two Septuagenarians Two Thousand Miles From home

Travel Becomes More Difficult as We Grow Older. We tire more easily. It is more difficult to travel at high speeds due to reduced depth projection and reflexes. Are we worse off than our grandparents in that regard? I hardly think so. Our cars are easier to drive. They have cruise control, power everything, and almost all are air conditioned. Why am I bringing this up? To call your attention to the improvement in our living conditions from our parents and grandparents age.

Now vs 60 Years Ago. The average house is 2500 square feet vs 1200 sixty years ago. In 1950, there was one car for every two drivers as opposed to more cars than licensed drivers today. We could look more at material things like televisions and computers with the same result but what about the non-material aspects of how we live.

Women and Minorities have More Freedom. Women are free to seek work outside the home, receive better pay, and hold more political offices by far than they did in 1950. Racism is still present but is not as extensive in a variety of situations where it used to be prevalent. We have better access to music, entertainment, and the written word by far than we did back then. Even education higher education is more available as one of two children participate in post high school education as opposed to one of five in the 60s.

We Must Be Overjoyed with Our Lives. This is hardly the case. When graded on the same happiness scale developed a half century ago, American happiness has failed to keep up with the progress in things we thought should make us happy. The average American is only slightly happier now than in the 1950's. Likewise for the average Japanese and Australian. The British and German citizens are less happy and the average Russian is much more unhappy.

So What Is The Cause? "Sweet are the uses of adversity which like the toad, ugly and venomous, wears yet a precious jewel in his head.." William Shakespeare. This little quote came from a verse in As You Like It." I was forced to memorize that verse in the ninth grade. It has stuck with me all these years although I never had a clue of what it meant. Now I do. It has to do with another quote from Nietzsche that says, "What doesn't destroy me makes me stronger." Have we had it so easy in the past 60 years that we are losing the ability to cope with adversity?

Research Suggests This May Be True. In a study that listed 15 of the worst things that can happen in life, such as the death of a child, torture, rape, or grave illness they located 1700 individuals who had experienced at least one of those events. When given a test they determined that these individuals demonstrated greater strength and more well being than those who had none. Further, those individuals with two such events scored higher than those who had suffered one, and three events scored higher than those who had suffered two. One more piece of research involved testing of a large sample of soldiers captured by the Vietnamese and tortured and abused for a number of years. Of these, 61% said they had benefited from the experience. Among others, they reported a better appreciation of the value of their own lives; a better understanding of spirituality; and a deeper appreciation of their relationships with friends and family.

So Should We Go Out and seek a Traumatic Experience? I certainly don't recommend that but perhaps we should recognize these events for what they are: An opportunity for growth. It also appears to me that the adversity that our ancestors went through might constitute at least part of the reason for the success of our country. They left home with little chance of seeing their family again, came to a place where they were forced to become self reliant, and faced a multitude of dangers. They grew stronger as a result. Perhaps our government underestimates the benefits that our citizens might obtain from doing what is necessary to withdraw from government benefits and become more self reliant.

Most of The Conclusions Drawn Here are Mine. The statistics cited here came from a book by an author who's work I have followed for a long time. The author, "Dr Martin Seligman wrote the book, Flourish along with several others including Authentic Happiness. Whereas much of the mental health research involves the study of mental illness, Dr Seligman has chosen to concentrate on the aspects of well being and how that can be improved in so-called normal people. His research, which has gone on for nearly 50 years has been extremely valuable to me.

THE SUB-PRIME MORTGAGE FIASCO.

Picture of my Mom (Left) when she worked at Paul's Diner.

I Have Posted Several Pictures of My Dad. Mainly because he recently died. Mom has been gone almost 30 years. I have talked a lot about how hard my Dad worked and it seems appropriate that I let you know that Mom was no slouch in this area either. She waited tables about as long as I can remember. I remember how proud she was of her tips as she kept them in a jar on the table. Perhaps that explains why I seem to leave bigger tips than most folks.

A Few Comments About the Mortgage Business. I started originating mortgages in the mid 1980's. The business was very difficult back then, mainly because of the work you had to go through to assemble a package that could be sold on the secondary market. A lot of people think about banks when they think about mortgages. The fact is that, only the large banks can afford to keep long-term mortgages and they often sell much more than they keep.

It Took Awhile. But we slowly gained market share because we added value be helping borrowers decide which type of loan was best for them and by preparing a file that demonstrated to underwriters how qualified the borrowers were to fulfill their obligations under the terms of the note. Our business peaked in 1993 when we made and sold $150 million in loans. We were heavily taxed to the point that, when the business slowed down, we could not keep all the people we hired. It had been my objective to keep these people as long as we could in case the market improved again.

The Government Was Always Involved The Business. They had an implied guarantee that they would stand behind Fannie Mae, Ginnie Mae, and Freddie Mac in case of difficulty arose that made it impossible to repay the bonds they sold to provide the funds to make the loans. This allowed these agencies to sell bonds at lower rates than most private companies. Some time later, numerous non-profit companies came out with statistics that showed that minority borrowers were turned down at a higher rate than non-minorities. This was true even though turned down minorities had the same income as non-minorities that were approved. All of these studies were flawed because they failed to take into account many other crucial aspects of the mortgage approval process. The government imposed a system called the Home Mortgage Disclosure Act (HMDA) that required all lenders to carefully audit each file and report the results to the government proving that no discrimination was taking place. This increased the workload across the board for the mortgage industry. As if that weren't enough, they pushed for relaxed guidelines in most aspects of the business so that less wealthy borrowers could get loans.

Getting a Mortgage Loan Became Easy. It became so easy that it attracted people with very little financial background into the business. They didn't need expertise, just sales skills. Large broker dealers got into the business. They could barely spell mortgage but they could raise money and sell to their vast network of investors. As underwriting guidelines became more and more relaxed, anyone who could fog a mirror could get a loan that they had little ability to repay. Probably the worst culprits in this fiasco were the rating companies that gave these so-called sub-prime loans an A rating, the same given to large companies with a considerable assets and a long term history of meeting their obligations.

This Made Our Services Less Valuable. When borrowers came to me I expended a considerable amount of energy showing them the implications of getting these loans. I made few loans during that time. What makes it even harder to accept is that many of these borrowers went to other companies who told them what they wanted to hear and approved their loans right away. The result of all these irresponsible practices lead to the breakdown that occurred in 2008.

A Concise Summary of Who Is To Blame. Strictly my opinion but here they are.

1. Mortgage Originators. Although a lot of them didn't know the harm they were doing, it was their obligation to find out. The worst players were those who knew but didn't care.

2. The Government. They pushed for more relaxed lending standards so that more people could buy houses. This was a laudable goal but one for which they lacked the vision to understand.

3. The Large Brokerage Houses. They didn't understand what they were encouraging their investors to buy. Again, it has long been their main function to raise money for business through the sale of bonds and securities. Although they should have taken some time to understand the implications of what they were selling, they treated these packages of loans the same as they treated other securities that they had more experience selling. When delinquencies occurred, they had little idea of how to enforce the terms and ultimately recover and market the properties that they acquired.

4. The Rating Agencies. They should have known that these loan packages were risky and undeserving of the high ratings they were getting. The public believes in these ratings as objective opinions of unbiased third parties who understand risk. No longer can we trust their opinions as being objective.

5. The Borrowers. In the final analysis, it is the responsibility of the borrower to understand the implications of the obligation they are undertaking. While lenders need to be able to explain these, and disclose the underlying risks, borrowers should not take their responsibilities lightly. In the absence of outright fraud by the lender, borrowers have little right to expect the government, charities, or lenders to excuse them from the consequences.

This Should Give You A More Comprehensive View of What Went On. Still, it is a vast oversimplification. One thing should be clear. There is plenty of blame to go around. Those who blame the president, congress, or wall street may be partially right but it goes further than that. I am definitely sorry for those who are losing their home to foreclosure but they definitely participated in this fiasco. Hopefully, they will be more prepared next time.