Subprime Mortgages

The TV Sitcom, “How I Met Your Mother” expertly laid out the Platinum Rule last week.  Too bad mortgage company execs didn’t see these around the year 2000.  Some of them may have been able to keep their jobs.

Barney, on the show, came up with the Platinum Rule of dating: Never LOVE thy neighbor because it never ends good.  He then stepped through the eight stages of such a relationship.  Funny thing…the platinum rule applies to subprime mortgages as well.

Step 1 – Attraction:  This is that first moment someone catches your eye.  “Hmm…subprime mortgages.  Sounds sexy.  Have to think about that.”

Step 2 – Bargaining:  Maybe we can make this work.  It seems to make sense.  Others are lending money to people with bad credit scores and getting away with it.

Step 3 – Submission:  All right, all right.  Other companies are killing with these subprime mortgages.  Let’s do it. 

Step 4 – Perks:  Oh Hell!  We’re rolling in reported earnings.  This is fun.  We give money to people who can’t manage their own finances.  Then they give us a note that says that they’ll promise to pay it back.  Then we sell that note to some other suckers and claim a profit. 

Step 5 – The Tipping Point:  Hmmm….interest rates are on the rise, home prices are declining.  These poor credit risks are paying off their debt on a variable interest rate.  This isn’t good…oh wait, more of them aren’t paying.  They’re getting behind.  Yikes.  (Nail biting ensues).

Step 6 – Pergatory:  Crap.  Blew this one.  Looks like we’re resigned taking some losses on these cranks.  Maybe I can sell this junk off to some other sucker.  We can tell everyone that we’ve done a good thing by getting people into houses – one – and getting them into houses that they otherwise couldn’t afford – two.

Step 7 – Confrontation:  Shareholders are pissed.  Hedge funds are coming after us.  Board is getting rid of me.  I’m toast.

Step 8 – Fallout:  Wow.  How did that happen?  I was on top of the world a couple years ago.  Now, I’m out of a job, damaged goods, didn’t even get an enormous golden parachute.  Me a Wall Street titan, a financial genius, bested by the people living paycheck to paycheck.  What went wrong?  Oh yeah.  Maybe I shouldn’t have been lending money to people who couldn’t pay it back. 

Go figure.  Lending money to people who can’t afford to pay it back isn’t such a good business proposition after all. 

Monopoly(tm): Electronic Banking

Hasbro, maker of Monopoly boardgames recently introduced a new innovation to the widely popular game – electronic banking.  No longer do you have to handle money, just insert your game card into the + or – side of the bank computer and enter the transaction.  It does all the math for you.

I have a problem with that.  Much of the good experience that comes from the game is from handling and managing the paper money.  That’s one more thing to think about and keeps lesser players from thinking about strategy as they worry about money flow.  It’s also a great educational tool to help people with math and money management.

I understand Hasbro’s intent.  I’m sure they believe money management is an impediment and this innovation will get more people playing.  That may be true.  But, for Monopoly die hards, it waters down the experience. 

If Hasbro wants to make a useful innovation to Monopoly it should creat a web-based game.  I’d love to be able to play one-roll-a-day Monopoly with my friends. This is what I want:

• Be able to set up a game room to invite specific people to a game.
• Game can be played over time.  System would e-mail you when it’s your turn to roll complete with a game progress summary and it would facilitate transactions between players.

Get to work Hasbro.

Fool me once…

“There’s an old saying in Tennessee — I know it’s in Texas, probably in Tennessee — that says, fool me once — shame on — shame on you. You fool me, you can’t get fooled again.” President Bush   

What would you do if your employer asked keep 20% of your pay for the period you just finished working? 

This could bring on a host of consequences.  One of those consequences might be that you become less willing to trade your time for unknown pay.  Others would feel the same, your company might lose employees and find it tough to replace staff once word hit the street that the company isn’t a reliable payer.  

Now, how do you think mortgage investors (the people who provide the money for others to buy homes) feel about the same thing happening to them?  They may be less willing to provide funds in the future, or they’ll at least want more income to compensate them for the risk of having to let borrowers go back on their word. 

Sorry W.  For those of us who try to make responsible decisions such as choosing to live in a home we can afford and financing it with a 30-year fixed rate mortgage to protect us from the pain of interest rate fluctuations, your proposal to freeze interest rates for those who aren’t as responsible is a slap in the face.

Fool me once, shame on you.  Fool me twice, shame on me.