I don't leave cash on my desk at the office. You don't leave your keys in the car at the grocery store. It creates a temptation for someone to make off with something of value that doesn't belong to them.
The term for creating such a temptation is Moral Hazard. The risk in Moral Hazard is that someone will succumb to that temptation, with a result that's not desireable. "The devil made me do it!"
That's what happened in the subprime debacle. "Hey, it's not my fault. They told me that even the banks called it a Liar's Loan."
Look for Moral Hazard to be the defense de jour in foreclosure proceedings that will be contested in the courts.
Does that sound ridiculous? Do you think it flies in the face of personal responsibility? Precedent exists in law, when an action deliberatley taken encourages the very risk-taking that one seeks to avoid. Like leaving cash on your desk at the office, or leaving your car running and unlocked while you're in the grocery store.
Prediction by Mike in Tucson: Rates will go back up soon.
Until this morning, the only Mervyn King I'd ever heard of is that Brit on the right--world champion at darts.
There's another Briton named Mervyn King. He's a Bank of England Governor. Reporter John Fraher for Bloomberg did an article today on Governor Mervyn King, who predicts a second round of credit tightening unrelated to US subprime foreclosures, but directly related to Moral Hazard and the risk associated with it. In short, the banks balance sheets are about to take a nose dive, tightening credit and driving credit costs higher.
Don't get too comfortable with the current low rates.
That's the opinion of this Tucson, Arizona mortgage lender.
Mike in Tucson
EDIT: See related post by Active Rain's Mike Mueller on Lenderama: Bad Loan Officer Collateral Damage
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I think rates are historically pretty low - and rates are not the problem - though the media has done a pretty good job of selling it.
I think it is prices vs personal income and commute time and work hours that has a bigger impact.
Mike - I SO hope you are wrong on this one. I fear you may be right. Thanks.
Kevin: I agree with the income/commute problem, and would add one more--banks are knocking down appraisals for qualified borrowers who have no income problem. Since they lend on the price or the appraisal, whichever is less, that hurts.
Dan: Thanks for commenting. We'll see, and that's certain.
Mike in Tucson
I am somewhat in agreement in regards to your prediction. Our housing market seems to be picking up and we even have areas realizing absorption. The birdie in my head says your prediction will be the third blip to the mortgage correction which will throw a wrench into our possible recovery!
Where does the claim that rates are historically low come from???? I think it comes from NAR.
Hi Mike,
I must be different from other readers because I honed in on the "moral hazard" in this post. As a child, I could not get away with that type of excuse, could you? I still don't believe in putting the blame for something I do on someone else no matter how enticing someone made it. Bottom line, I am an adult and am responsible for my decisions and actions. When I make the wrong decision, I have to pay the price and some times that is painful.
As for your prediction, I pray you are wrong.
Mike, I think we all need to ask Santa for that crystal ball that Kris Wales is asking for! But, I agree with you...they will eventually have to go back up unfortunately.
Linda: Thanks for commenting. Please see the edit link in the story and go comment on Mike Mueller's post on Lenderama.
Cynthia: The Moral Hazard dilemna goes to the heart of the risk we face as Lenders and Realtors. Thanks for picking up on that. See Mike Mueller's post for more on this.
Lenn: It's good to see you. I guess it depends on the length of one's historical perspective. How far back to we go?
Renee: I'm confused. Please come back and give some clarity to "The birdie in my head says your prediction will be the third blip to the mortgage correction which will throw a wrench into our possible recovery!" What does that mean?
Mike in Tucson
Mike: Geez... you never shy away from an ever-so-slightly-controversial post! lol. I like the crystal ball wishes everyone has... nobody knows what trouble we'll see (though some may know the sorrow). ;) Keep up the good work Mike!
Mike~ I really hope your prediction is wrong. We need to get rid of inventory and we need buyers who need these lower rates. I'm not advocating giving loans away, but give a well qualified buyer a chance with a decent rate.
Mike, I hope that's not the case and that you're wrong (for once)!
I think (just what we need...one more opinion) we all need to take it one day at a time. We can't change it anyway....and it's going to be a very long haul.
Here's a make believe scenario.
Seller is strapped because he bought another home. He agrees to a contract price of $550,000. and, after negotiations, agrees to pay $6,000. of the buyer's closing costs on top of his price concession. The seller feels pressured, and is not happy.
Buyer has $150,000 to put down because of an inheritance, but the buyer is also in a tight position financially, and his real worry is making the $2,495 P&I mortgage payment on a $400,000 mortgage. Buyer is anxious because that's more than he's used to spending on a mortgage.
The buyer's agent's lender buddy had quoted 6.375%, 30 year fixed, with 1/2 origination on the GFE. Yield spread would fatten the broker check by another 1.5%, so she's looking at a gross commission of $8,000. before her split with her employer. It's been a while since the Loan Officer has had a pay day.
Because the deal's so tight, the buyer's agent prevails on the loan officer to lock the loan closer to par, cutting the LO's commission in half because the yield spread has vanished. The buyer's rate is now 6.125% The payment is $2,430.
Buyer is still a little anxious, but the concession mollifys him. You're happy to have put the deal together, finally. The Seller is relieved to have what looks to be a solid contract. The buyer's agent / loan officer relationship, however, is fraying at the edges, because the agent leaned on the Loan Officer to reduce her commission. Hey, maybe you and the buyer's agent both gave up some of your commission, too. That's life, right? And there are a lot of loan officers out there who will take the business if this one won't play ball.
That's what's happening in todays market. Here's a better scenario. At an 80% (or less) loan to value, the seller can contribute up to 6% towards the buyer's costs, not that the seller wants to do that. But he's willing to do something. How that contribution money is spent makes all the difference in the world.
Rewind to the afternoon your seller agreed to accept the offer of $550,000, with a $6,000 contribution toward closing costs. You put on your Advisor hat, and suggest the following
Let's counter to the buyers agent as follows: "Contract price shall be $558,000. Seller agrees to contribute up to, but no more than $8,000 to buy down the interest rate on the buyer;s purchase money mortgage, and will contribute an additional $4,000 towards the buyer's closing costs." That little suggestion does many good things:
(A bank won't go too low on the interest rate, because they have to pool loans and sell them on the secondary market. If you have a portfolio lender, though, you can go very low. We did this for a foreign national and locked him at 4.5% for 30 years. He thinks his realtor walks on water. She had been in the business for all of 8 months!)
Lisa, this isn't a comment. It's a post!
Mike in Tucson
Good stuff, as always, Mike. Thanks for the article.
Right on Mike!
Interestingly it was an Ed Rybczynski post that kick started my mind about this. In it he quoted a woman who said...
"My husband and I were victimized by our mortgage broker, appraiser and lender."
Get ready, here it comes...
PS: thanks for the link love!
Mike--I just received a note from one of the loan officers I work with discussing this weeks low rates. She said that everytime that rates hit a historical low they will start to rise and won't be seen again for many months. Interesting...I think she agrees with your prediction.
Mike - thanks for the information -
Hello Mike,
Great post and I love the scenairo, keep up the good work.
Mike - my gut tell me rates drop big time tomorrow based on more bad news concerning the economy....
just a hunch.
Mike~ just checking back in. You're right, make it a post!
Mike- And the rates are going to be lowered again, which I feel is not the right thing to do, We need to tighten our personal spending especially with credit cards and mortgages you may not be able to afford when your rate changes. Katerina
Mike,
I couldn't agree more. Interest rates are going up.
Thanks, all, for commenting. I can't keep up with you, but I'll come comment on your blogs. We'll see what tomorrow brings. Lisa, I did make the mega-comment into a post.
Mike in Tucson
I was just watching CNBC - Erin Burnett, in an interview with Howard Shapiro (Fox-Pitt Kelton, a Mortgage analyst) was discussing Countrywide and the Govt. idea to freeze some mortgage rates.
One of the terms he used was "The Moral Hazard". I guess he's reading your blog!
Mike: I'm with you on this. You are (in my humble opinion) right on the money. :-)
Elizabeth: Thanks for your opinion!
Mike: He might be a reader; let's invite him to join Active Rain!
Mike in Tucson
Mike ~ Great points and I love the fact that you have linked to Mike Mueller's point on the issue. i happen to believe you which is why I am telling people that right now is the very best time to purchase a home. Home prices are fairly low and interest rates will only go up from here. Thanks on giving us a relevant blog! :)
Sarah:
You're most welcome! Thank you for stopping by to visit and comment.
Mike in Tucson
Anytime, Mike! Glad to see that you are as aware and clever as ever! Make your day a great one!