I seldom veer off the subject of accounting in this space unless circumstances or events encourage me to do otherwise.
So for one week at least, let’s forget accounting and talk about accountability.
Specifically, accountability over one’s finances, fiscal solvency and those who seek to absolve them of that responsibility.
Enter the new chairman of the House Financial Services Committee, Rep. Barney Frank, D-Mass.
Sparked no doubt by the fallout in subprime mortgages and a rising number of homeowners who fail to repay their home loans, Frank recently crowed to The New York Times that he will propose legislation to prevent what he termed as “predatory lending practices” for home mortgages.
On the surface it would appear to be a laudable mission. Owning a home should be an attainable goal to everyone -- not just those hauling down six and seven figure salaries.
But scratching about an inch below the surface, Frank’s plan would entail legal liability for defaults “up the chain” -- or rather straight to the firms that package the original loans as mortgage-backed securities and then sell them.
Under Frank’s plan, even the borrower can make a claim and the litigation -- would, well, move up the chain.
Frank admitted that the measure may discourage certain types of lending, which is like saying that keeping a porthole open on a submarine may result in taking on some added water. He also seems oblivious to the fact that his own state of Massachusetts already has such restrictive guidelines on mortgage lending that many lending companies already avoid doing business in the Bay State.
Enter, Chris Dodd, senior Democratic senator from Connecticut and, oh yes, one of myriad 2008 presidential candidates.
Dodd said that he also was considering lending legislation but instead hoped to curtail predatory lending practices via regulators adopting tougher stances.
Meanwhile, Dodd’s Senate colleague, Charles Schumer of New York, is in the process of compiling a report on fallout of defaults in the subprime market. Schumer maintained the risks associated with these type of loans were simply too great for the people receiving them.
And lest not forget Hillary Clinton who told a financial news network that the rising rate of foreclosures should be “an alarm bell.” It’s curious no alarm bells went off when the tech sector bottomed out on her husband’s watch, but I digress.
Unlike Barney and friends, I have the advantage of a spouse who has toiled in the mortgage industry for nearly 25 years and is therefore well acquainted with lending guidelines.
She has seen and worked with credit reports that defied reality in terms of accumulated debt, massive credit-card charge offs in relation to income and credit scores that fell below the math portion results of my high school SATs.
Owning a home should be something that everyone has a right to pursue. However, it’s not an entitlement program. Home ownership has to be accompanied by a measure of prudent fiscal responsibility. I’m not talking about foreclosures or loan defaults as a result of unforeseen circumstances such as catastrophic medical expenses or a divorce, but rather because borrowers can’t, or won’t, take the time to understand what they’re signing.
Sure, a subprime loan may offer enticing rates the first year, but what about three years down the road?
I’ve witnessed firsthand a subprime company go bankrupt, because a borrower with a horrendous track record of credit screamed loud enough about biased and predatory lending that it caught the ear of a national business publication. A series of unflattering articles later and the company was boarding up the windows.
To be sure, there are those companies that capitalize on the financial naiveté of potential customers and, after a period of affordable “teaser rates,” render them to a payment schedule like those seen on The Sopranos. And few would argue that action has to be taken.
But conversely, all the litigation in the world won’t blunt fiscal recklessness or teach someone how to be accountable for their financial health. That would require a combination of education and self-help.
In the end it would simply add another excuse to the shopworn mantra, “I didn’t know what I was getting into.”
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