Consumers, Lenders, and New Year’s Resolutions

January 1, 2009 by  
Filed under Debt and Credit

I don’t plan on writing much today as I suspect that most computer users are either hung over, watching football, trying to lose weight, or cleaning up all of the holiday mess.

Mr. ToughMoneyLove has been informally surveying New Year’s Resolutions posted by various internet users, particularly in the personal finance world.  Even the federal government has published a list of the most popular New Year’s Resolutions.  Second on the list is “Manage Debt.”  That’s outstanding.

Based on their recent market behaviors, banks and other consumer lenders have also made resolutions of their own.  The question is, who will do the best job of following through on their personal finance resolutions, consumers or lenders?

I am concerned that the lenders have a big headstart.  Clearly, mortgage lenders and credit card companies have blazed a trail back to lending basics.  Credit underwriting is actually being used again, with verification of income, careful review of debt-to-income ratios, and increased credit score requirements.  This is a good thing.  In one sense it’s unfortunate that the lenders had to intervene in this way because it reflects the reality that consumers would not police their own borrowing behavior.  But someone had to do something to break the consumer debt addiction and it’s better that the market do it rather than the government.

The reaction of many consumers and government policy makers to the tightening of consumer credit standards has me concerned.   Instead of congratulating banks and other lenders on taking positive steps to insure that people who borrow money have the ability to repay it, folks are demanding a return to the free-flowing credit days of old.  I am in favor of opening up the business credit pipelines.  But what is so horrible about asking consumers to follow the lead of the banks and move back to old school lending and borrowing practices?

Here is one piece of recent evidence that supports my argument that the lenders may do better than the borrowers with their resolutions.  According to this post in the Wall Street Journal, Congress is upset that the government’s “Hope for Homeowners” foreclosure avoidance program has done virtually nothing.  It seems that the reason for this failure is that for a borrower to participate, he or she must certify that the borrower did not make any false or misleading statements on a prior loan application.  Oh-Oh.  Busted.  It also seems that there were more “liar’s loans” than we thought.  So many borrowers (perhaps aided by greedy mortgage brokers) were fabricating income information on their initial loan applications that now they cannot participate in the loan workout program.  If they did, they would be compounding the lie.

This is the consumer credit mindset that we need to eliminate.  Lying to borrow money can no longer be accepted by anyone.  I’m no fan of lenders in general but if tightening of credit standards by lenders forces consumers to “manage their debt” better, then more power to them.  Indirectly, that helps everyone’s personal finance resolutions.

Image credit:  CJLUC

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6 Responses to “Consumers, Lenders, and New Year’s Resolutions”
  1. Lou says:

    While i agree with your basic philosophy, I think youmay be being too easy on lenders & too tough on borrowers. The realtors and banks are far more familiar withj the paperwork that accompanies a mortgage and the average consumer just signs & signs and signs at the closing/settlement.

    My niece is in her mid 20’s; her mother has been a realtor. When my niece got a mortgage last year, she applied for a fixed rate loan. After the dust had settled and all those papers were signed, it turned out she had a ARM, something she had been adamant about NOT wanting. So a relatively savvy consumer can be the victim of such a “bait and switch,” and such a practice can be implemented by the bank and realtor, without that consumer noticing.

    Lots of first-time home buyers were deliberately misled.

  2. GettingUp says:

    A very good post pointing out the folly, or fraud, of the easy credit crowd! It may be a rough correction, but everything will be a whole lot better when it is done…

    That is, if the government can stay out of it, and let the free market handle everything.

  3. Lou: I agree that particularly in the case of your niece, the lenders and realtors who facilitate these bait and switch scams should pay for their actions. Also, I wish there was a way for borrowers to do a better job reading and understanding what they are signing. I do not feel sorry for the “liar’s loans” crowd.

    GettingUp: It seems that the government is not just willing to let the damage and pain play out in the market and will try to re-engineer the system in a way that may prolong the agony.

  4. Lou says:

    I agree that there were buyers who knowingly mis-stated their financial status, But they fall into 2 or 3 groups – the ones who were scamming the system (esp those trying to earn a quick buck by flipping) and the ones who were scammed, either because lenders didn’t require documentation (buyers dumb but truly innocent) or because someone on the seller side said “Let me help you here, If we say you are making such-and-such salary we can get you into this house” (buyers dumb and colluding, not truly innocent, but willing to be conned.).

  5. Lou says:

    IF you feel sorry for the rich people scammed by Madoff, you might be able to see the people in my last category as similarly conned. For myself, I’m sorrier for poor people who wind up homeless than for rich people who suffer lesser consequences.

  6. Dorothy says:

    Yes, lending practices need to make more sense, with more accountability on both sides. And yes, there were lenders who were willing – even anxious – to sell loans people could not afford. I still think that all of us need to stop excusing the “innocent” consumers, though. Every individual is responsible for the loan papers he or she signs. You can’t blame it all on the lender. “I didn’t understand” doesn’t cut it…

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