Take a long-term look if you must make short-term gasps

First of all, my clients are not driven by the day-to-day, what’s-going-on-in-with-the-market-now investors.  They’re not stock price chasers.  They’re not betting on the next big thing.  Or, if they are, they are doing it on their own in the context of the larger plan that we’ve built for them.  So, it’s not necessary for me to blog or twitter or comment on what’s going on in the market(s).

Second of all, information is widely available from many various contradictory sources of varying reliability.  Remember, predictions and explanations are often the result of crystal ball work, and your crystal ball is as good as anyone else’s.  I don’t need to add to the insanity.  That brings me to my last point….

The markets are going to do what the markets are going to do.  The only thing you can control is your relationship to it—whether to participate in it, how much and with what philosophical bent.  If you feel good about your overall plan and your relationship to the markets, then anytime you see “bad” news, you can say to yourself, “My plan anticipates this market volatility happening, and I know that I’ve set up my investing to accommodate that volatility with the level of risk I’m willing to take.  Nothing to worry about.”  Then go spend time with your family or doing things that bring you happiness.

What to consider

     There was a great article in the New York Times not a month ago about this very topic (“Just Walk Away” by Roger Lowenstein).  If you’d like a copy, send me an email, and I’ll pass it along to you.  The author’s main point was this:  Big companies don’t hold onto bad assets, feel no shame about unloading them, and don’t worry about their credit ratings.  These companies practice “strategic default.”  Case-in-point, I just recently received an email from a company from which I buy products informing me that it was filing for bankruptcy.  It explains, “As numerous companies have demonstrated during this difficult economic cycle, using this type of legal process can be an effective way of achieving a fast and efficient debt restructuring with minimal disruption to the business.”

     So why should individuals act differently?  Why does the Obama administration ask homeowners to continue paying on their debt on homes in which the debt exceeds the value by 2-to-1?  Because it’s good for the banks, which are selling off their mortgage portfolio to the Fed because it’s a good business decision to unload as many bad assets as possible?  I don’t get it.

     If you decide to walk away from a piece of property and your mortgage obligation, you still have to live with yourself.  If walking away from the debt takes off years of your life in guilt and stress, it’s not worth it.  But if unloading the asset in a time in which banks are prepared to deal with it, why not take advantage of opportunity to put yourself in a better place financially?  Yes, your credit will suffer.  Temporarily. Yes, you will have reneged on a promise.  To this point, I thought the article put it brilliantly:  You did promise to pay, but the contract outlined specific penalties for non-payment.  “The borrower is not escaping the consequences; he’s suffering them.”  I also agree with the author that a flood of “strategic defaults” by homeowners might lead to more loan modifications by banks, which is what’s supposed to be happening.  It might “un-stick” the system, which would be good for all of us.  Consider walking away.  Talk to your accountant, your financial planner, your bank.  Get the facts and then decide.

When we look just at the numbers from 2009, it feels and seems like a great year.  But it’s been tough—more regulation, daily underwriting guideline changes, new rules around appraisals, and loan files that are scrubbed with a toothbrush.  We’re lucky to be able to channel our loans through a company that has had the foresight and fortitude to survive, but it’s been twice the work for half the money.  And it’s getting worse.

The unfortunate part about all these changes is that they don’t serve the consumer at all.  Loans take more time and are more expensive.  There are fewer options in loan products and lenders.  The paperwork and the confusion have only increased.

The good news in this is that the market and the increased regulations have driven out the bad apples in the business.  There’s no more low-hanging fruit, so those who didn’t know what they were doing or were doing it badly have long since left the business.  In a way, the market alone has solved a lot of the problems that were created in the subprime and “stated income, stated assets” loan profile industry.  Those of us who continue to run a high quality business have survived.

The sad part about it is that I’m starting to see the really good people—true mortgage professionals who provide great advice and care for their clients—start to consider leaving the business.  The loan process is too complicated and sophisticated for anyone to learn in a 60-day escrow. Most financial planners understand the basics of loans, but often rely on mortgage professionals to help them integrate the loan choice into a client’s overall long- and short-term financial plans.  Where will good advice come from if not from a seasoned mortgage professional?

What can you do?  If you’re politically inclined at all, write your Congress representatives and tell them that you believe the Federal Reserve’s proposal to fix the income of mortgage professionals on any size loan will not serve consumers (particularly those with lower loan amounts), that you appreciate the work of mortgage brokers and bankers, and that the regulations put in place so far have not served the industry well.