Issue #5, Summer 2007

Unsafe at Any Rate

If it’s good enough for microwaves, it’s good enough for mortgages. Why we need a Financial Product Safety Commission.

When markets work, they produce value for both buyers and sellers, both borrowers and lenders. But the basic premise of any free market is full information. When a lender can bury a sentence at the bottom of 47 lines of text saying it can change any term at any time for any reason, the market is broken.

Product safety standards will not fix every problem associated with consumer credit. It is possible to stuff a toaster with dirty socks and start a fire, and, even with safety standards, it will remain possible to get burned by credit products. Some people won’t even have to try very hard. But safety standards can make a critical difference for millions of families. Families who are steered into higher-priced mortgages solely because the broker wanted a higher fee would have a greater chance of buying–and keeping–a home. A student who wanted a credit card with a firm credit limit–not an approval for thousands of dollars more of credit and higher fees and interest–could stay out of trouble. An older person who needed a little cash to make it until her Social Security check arrived would have a manageable loan, not one that would escalate into thousands of dollars in fees.

Industry practices would change as well. Corporate profit models based on marketing mortgages with a one-in-five chance of costing a family its home would stop. Credit card models that lure 18-year-olds with no income and no credit history into debt with promises of “no parental approval”–on the assumption that their parents will pay it off, rather than see their children begin their adult lives with ruined credit histories–would stop. Rollovers that can turn a simple loan into a mountain of debt would stop.

Personal responsibility will always play a critical role in dealing with credit cards, just as personal responsibility remains a central feature in the safe use of any other product. But a Financial Product Safety Commission could eliminate some of the most egregious tricks and traps in the credit industry. And for every family who avoids a trap or doesn’t get caught by a trick, that’s regulation that works.

 

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Broken Contract by Jason Bordoff

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Issue #5, Summer 2007
 
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Jim Flanagan's Response You Missed the Mark:

To compare a mortgage, an instrument used to purchase, secure and collateralize a piece of Real Estate, one of the main avenues used to create and build long term wealth in a short time, running neck and neck only with the stock market for vehicles to create millionaires and billionaires. It is the only way someone with nothing can secure the American Dream and enter an arena with so much potential. When a college degree, the school you went to and it’s ALUMNI, no longer matter. The educationally challenged home schooled degree of hard knocks is OK. They can play they are now in the game and on the field and can compete. I fail to see how this matches up against a broken toaster that can burn down a house, building, and block. Also kill yourself the kids and the neighbors, maim and/or steal unlimited lives or the microwave that can cook your brain rendering you, your college degree’s life experience useless. The fact that there is no age limit on shopping in the mall, online, catalogs, mailers and the HOME Shopping Network’s, minors can buy and CHILDREN whether supervised or left home alone can and would play with and injure or kill themselves and/or countless others, to a mortgage payment to a subprime lender from a family that was paying 1,500.00 a month RENT supporting his Real Estate investor landlord and now is paying equal to or LESS for his own home which he just bought, that he now gets his tax shelter on his mortgage interest, closing costs, home structure depreciation and appreciation in value driving up his net worth and are now getting a shot at the American Dream of home ownership and success. Because, the subprime bank (of private investors) gave him the money because the conventional lenders would not take the risk with the odds being too great. Tell that family that a subprime mortgage and a broken toaster made in and imported from China are the same. Even if he lost the home in FORECLOSURE, if it was the apartment, he did not own, it would have been called GETTING EVICTED either way the family is in a shelter no one really cares if he got there from an eviction with a subprime lender taking the investors payment, collecting the rent to repay his subprime mortgage on the same home 2 scenarios. Why is it on one we care and one no one hears about? This is nothing more than an opportunity for a platform to promote a future political adgenda and you the author, with a degree from “The Most Prestigious University in the entire World, “HARVARD LAW SCHOOL” an Ivy League school and you just drafted an article in laymen terms with a catch phrase of a crooked politician, meant for the masses of the laymen educationally challenged and threw statistics in there that they wouldn't have read anyway according to the credit card portion, I don’t get it. You insult the intelligence of your audience, which could use solid advice from someone of your caliber and print non-sense. You referred to scare tactics and yet you use the same ploy it in your headline with big bold font. You learned researching the subprime thieves. You want to protect the consumer put a CAP on the payments and Rate spikes. Allow the borrower the chance to be forgiven a grace period when forgetting the anniversary date of the payment adjustment, notify them 6 months prior so they can refinance the mortgage out. Sell the info to other banks so they can call the guy with offers and get him out of trouble before the credit scores drop. Because now there are no more sub prime lenders left, OPTIONS are gone. At least they had the shot, sometimes people have to be given the opportunity to fail. AS for the credit card portion, why it was there this was a mortgage slogan and topic and you should have saved it for another article the credit cards are a totaly different animal. Maybe the schools should have educated kids on real life like business, real estate, money and marriage years ago instead of pumping out real world morons and illiterates like cattle that can’t balance a check book or read financial statement. In the end that’s all the ANY Lender Cares about anyway isn’t it. Someone with your knowledge and background can really make a difference. You sold yourself and your readers short today. That topic could have had some serious impact, articulated properly, by you Professor. With an article like this who would you recommend, running this committee, which blundering pile of ineptitude would volunteer and generously offer their 2 cents worth of their 1 cent opinions, without having a pulse on how this really started and how to fix it without directly crossing lines into other agencies and free markets. Remember always start with the end in mind and from the local ranks to complicate things will be.......

The Financial Product Safety Commission LOL

P.S. Aren't they still selling bootlegs and knockoffs all over

Thats because rules restrict the good guys and the bad guys never played by them in the first place

Forgive me if I was harsh.

Professionally Yours,

Mr. Jim Flanagan

Jun 23, 2007, 7:30 PM
Nancy Seats:

Thank you for this outstanding analysis of the financial markets industry. Everyone in the nation should read it, but most partiularly, CONGRESS.



One thing that you may not be aware of -- the product safety commission does an outstanding job on the issues that they cover, but did you realize that HOUSES are NOT coverd by anyone regarding the safe and sound construction of them? Houses are considered real estate, NOT a product. CRAZY?? You bet!



Today Consumer Reports says the 17% of new homes built each year have two or more serious defects yet there is NO consumer protection for the largest purchase a family ever makes.



SO we not only have predatory/fraudulent lending leading to foreclosure, we also have serious structural defects. Most builders have binding mandatory arbitration clauses naming the arbitration service that must be used -- builders are repeat users and arbitrators who are on the list to choose from know where their bread is buttered. Not only that homeowners who go through this kangaroo court nearly always get a gag order so that they can't warn others about the bad builder OR the horror of arbitration.



Thanks again for writing this paper. I am sending it to everyone I know.



Sep 9, 2007, 1:30 AM
Diane R:

Thank you. Excellent idea - I fully support it.

Mar 24, 2009, 3:59 PM
JTFaraday:

"President Obama appointed Elizabeth Warren to establish the new Consumer Financial Protection Bureau–“€”an agency that Warren first proposed in the Summer 2007 issue of Democracy.



The creation of the new bureau was a key provision of the financial regulatory reform bill that President Obama signed into law this summer. Warren will serve as Assistant to the President and Special Advisor to the Secretary of the Treasury to get the new agency started."



That's all very well and good, but why are we congratulating ourselves that



1). Warren is merely advisor and not official head of the agency?



2). this alleged "consumer protection agency" is housed internally at the federal reserve BANK?



3). you're so far behind the curve that "Democracy: A Journal of Ideas" is effectively lying to the public?



http://www.nakedcapitalism.com/2010/09/elizabeth-warren-on-way-to-being-sidelined-as-head-of-consumer-protection-agency-relegated-to-advisor-role.html



I'm taking a very long term view here. The 2010 election is over and you're coming out of it looking like a delegitimized tool to me.

Sep 20, 2010, 2:07 PM
Ninaannuary:

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Mar 17, 2011, 1:41 PM
Dr. Paul G. Scheurer:

Discussions as to who it right or wrong about anything is a waste of ones time.
For example, there is an ongoing lawsuit which concerns the restoration of our NE fishery. What is important is not the lawsuit but How the fishery is to be restored - the solution to the problem, not the political solution but the real solution based on scientific evidence, a real plan of action that promises to succeed if followed with diligence.

In all the years I have been reading the Gloucester times, I have not read one comment as to any solid scientific plan to restore the fishery.
I can shake one our of my sleave. Am I so different from anyone else when it comes to doing simple things which make sense.

Worse, no one seems willing to come together and discuss the problem - our problems.

Mar 30, 2011, 5:57 PM
Pat:

It is all but impossible today to identify a legitimate creditor because of the changing nature of business, and the "identity hats" worn by "instant companies, and fly-by-nights" that are here today and gone tomorrow."

40% of companies in the top rankings of the Fortune 500 in 2000 were not there in 2010, as reported by business analysts.

Who's kidding whom?

May 24, 2011, 9:53 AM
humanetigor:

Road to the Truth can be found at the following address: truenewworld.com
(attention, it is not the ad of the site - it is the ad of the Truth).

Jun 22, 2011, 1:25 AM
REB:

An economic thought for today. Eighty percent of the Fortune 500 companies have off shore accounts, the Fortune 500 hire twenty percent of the work force and make eighty percent of the profit-so long small business and hello to higher unemploymet. And yes, good bye Elizibeth Warren. How dare her to do what should of been done years ago, take away the punch bowl now that the corporate party is coming back. Regulation, it's the cross that corportate vampairs hate. Not all but some companies, banks, and financial institutions are " cooking the books". Some but not all buyers, put the wrong information on their mortage application. "Man, they are break'n the law, break'n the law". Our politians, big business and labor unions think that "the road goes on for ever and the party never ends". Soon our foriegn investors will be talking to the IMF. No, make that screaming to the IMF. You don't like Dr. Warren's kind of regulation and micro-management skills? Wait and see what China does. Mao Zedong once said-"to get a cat to eat chilli powder you put it on its bottom. When the cat feels its bottom burn it would happily lick it off". If things get bad enough, we'll do what ever we are told and that is the reality of economics. Dr. Warren is looking sweeter by the minute compared to unchecked corporate America.

Jul 18, 2011, 9:37 PM
nosleepingdogs:

@ JTFaraday asked,

why are we congratulating ourselves that
1). Warren is merely advisor and not official head of the agency?

Elsewhere I read that this happened because if she were made head of the agency she'd need Senate confirmation, another circus! and this way she got to spend the time trying to form the agency so it could do its job instead of schmoozing with senators.

Aug 2, 2011, 2:22 PM
Stephen Watkins:

Two quotes apply here:

"Power corrupts and absolute power corrupts absolutely."

"It's all about the money, Honey!" (From a prostitute to a longtime customer)

Dec 7, 2011, 1:21 AM
Jonny:

really an excellent post. I have been advocating for control over the 90 mortgage problem for years, and its great to see people doing things along the same line.

Feb 20, 2012, 7:51 PM
nothappy :

if you have been in this postion for this long (2007) why are we still having a porblem, & still using tax payers money to bail every one out

Aug 25, 2012, 11:20 AM
gc_wall:

The financial services industry argues that without the right to take suckers capitalism cannot succeed. It believes that this unwisely unwritten constitutional freedom is what makes this country worth fighting for. It provides and opportunity for the incompetent and dishonest to make a living with the expectation that consumers are free agents capable of making irrational decisions on their own and educating them to all the tricks and traps that await them under a free market are necessary for them to mature and become cynical users as those who used them. Taking advantage of the vulnerable. unsuspecting and naive' is free market capitalism. Honesty in lending, purchasing and investing would come to a halt without the sacred right of those who are experienced to exploit the inexperienced. This assumption stems from the idea that victims only need to learn from being used so that they can become users who in turn can then prey on the current generation of suckers. Such is the upside-down, inside-out world a generation has been taught to accept.

Nov 8, 2012, 3:34 AM
Pat:

Big government doesn't care about the little guy. The only solution is not to buy in the first place.

Allowing the rich to tax the rich is the kindest method of having to come face to face with the fraud they perpetuate.

Until fraud formation and passing the buck of fraud is cured, America can't come back economically.

Feb 26, 2013, 9:48 AM
David:

To compare a a home to a toaster is a bit of a stretch. If a free market as well as free from Stock Market Speculation Real Estate appreciates while personal property depreciates. Home may burst into flames, thus insurance, there will always be home buyers to feed the machine, as long as Banks refuse to turn real estate into slot machines and due-diligence to prevent fraud. Please Wath my Video: Orange County Realtor

Feb 26, 2013, 11:13 PM
Brad:

You guys (especially Jim Flanagan) need to get more in-tune with how the 2008 financial crisis actually happened. Read The Big Short by Michael Lewis and you guys will quit being so objective.

Oct 3, 2013, 9:57 PM
Brad:

Or just look up collateralized debt obligation and credit default swaps

Oct 3, 2013, 10:03 PM

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