Trust me…one bottle will cure you in 7 days
There was a time when Snake Oil salesmen travelled from town to town selling their product. They would set up shop on a street corner or in a vacant lot and begin extolling the curative powers of thier elixer.
“Friends, I can see many of you suffering from ill health. I can hear the coughs, the sneezes and the wheezing. You are suffering. Today, you will suffer no more. Buy one bottle of my Mozillo Snake Oil, take a table spoon every morning and I guarantee that within 7 days you will be symptom from. You will be cured! Some of you may remember I was here 6 short months ago. I see Jack Queen over there. Jack, you bought a bottle… tell the folks what happened.”
The older fellow, Jack Queen responded, “Why I was on death’s very door. I took the medicine and 7 days later I was cured. Used it in on Ezra Tucker a month or more back, he is fit as a fiddle today.”
The crowd begins to line up and within a short time, the Snake Oil salesman has sold out of every last bottle he had brought with him. Men, women and children headed back home to begin the cure. Tissues in hand they made there way to the comfort of warm living rooms and comforter covered beds.
Seven days later, the sun rose on the town and every one of those that had taken the medicine was symptom free. They met one another in the market or at the coffee shop or in the library and shared how wonderful it was to be well again. They were convinced that the Snake Oil was miraculous.
Then fact seperated fiction and reality replaced illusion … and the Snake Oil salesman had to find a new product. Modern medicine stepped up and revealed that the common cold usually last anywhere from 3 to 7 days. The discomfort is most easily dealt with by staying warm, inside and getting plenty of rest. If you just completely ignore the cold, chances are it will disappear within 7 days. The Snake Oil did have a correlative relationship to the cure…but it was not causational.
This Snake Oil was just as easy to take, but it cured no ills
The most recent products have been the multiple servings from the mortgage industry. They have created all sorts of variable priced loans. A borrower can choose from an “adjustable rate”, a “teaser rate”, “interest only” or one of the other fancy terms used to describe the pandora’s box of options presented them. They are all “legal”. They all do exactly what they claim to do. They all remain available. And, if judged with a careful eye, they are as valid as the Snake Oil of days gone by. If you take out a mortgage, with one of these instruments, you home will be paid for in full at the end of the term of the loan.
The difference between Snake Oil taken to cure the common cold and this new version is quite apparent. The common cold was going to run its course over 7 days. Regardless of whether or not you took the medicine, you would be cured. The new version requires that you actually follow the terms of your loan.
The salesman may extoll the wonders of a loan that begins at a much lower interest rate (say 3.5%) and he may show the borrower a chart that indicates the monthly payment for a $200,000 loan will only be around $1,360 per month. He will point out that the borrower only need an income of around $57,000 -$58,000 to qualify for this wonderful program.
If asked about the a(djustable) r(ate) part of the loan, the salesman will most likely point out that the borrower is young and will be making more money by the time the loan resets (increases in monthly payment) and the home will probably be more valuable then as well. He will imply…Why wait, you can have more home now? The fine print that caps the loan at 8% is mentioned in passing.
Let’s be very clear. This is all legal. This is all true. This is all based on IF. We have an entire industry in taters because no parent, no boss, no legislature, no official demanded that WHAT IF should be part of the conversation. Literally millions upon millions of people drank the new Snake Oil and IF never happened.
WHAT IF regulations were in place that stated the person with an income of $57,000-$58,000 could only borrow enough for a $135,000 home if the interest rate could cap at 8%? All the other IFS would have little impact on the borrower. Their earlier home payments would be lower, but they would cap out at an amount that the borrower could still afford. (less than $1,400 per month)
A sign of the times
It is time that we stop blaming the Snake Oil and start restricting the salesman. History has proven, when it comes to financial planning and budgeting, we need to be protected from ourselves. Despite the rare headlines pointing out isolated cases of mortgage fraud, most people took the emotional route when borrowing money to buy a home. They believed that their income would rise. They believed the value of the home would rise. They believed that the mortgage would never reset to the highest limit. They did not believe lies…they believed in maybes. They grasped the IF with both hands and WHAT IF was left to linger in the corner with the reat of the never completed thought processes.
None of the usual reasons offered caused the housing crisis and melt down. The correlation between everything offered is certainly reasonable. Snake Oil will always be around. It really will never harm anyone as long as it is taken with a healthy dose of reality. And in reality, lending money based on hopes and prayers is something that needs to be terminated.
One of the wisest steps the administration could take would be to refuse to guarantee or insure any mortgage loan amount in excess of what the borrower could afford to repay based on the amount borrowed at the maximum interest rate the loan will allow.
Just a thought, of course, I may have sipped some Snake Oil before breakfast this morning.