How Banking Reform Hurts Consumers
The politicians in Washington are worried that the “big banks” might once again “run amuck.” Instead, they should be worried that they will over-regulate and destroy consumer-friendly banking and mortgage options.
When I had returned from Iraq I was able to secure a mortgage loan for my condominium by employing a now discredited and unavailable loan type: the “option-arm loan.” This loan allows the borrower, for a five-year period, to make a minimum monthly payment that is less than the interest accruing on his loan. Since the borrower’s loan debt increases during the initial lending period, when he refinances he might be forced to bring tens of thousands of dollars to closing.
The media typically covers these loans with sad-sop stories about people who allegedly have been fooled into them. These people supposedly didn’t know what they were getting into and now face the prospect of outsized mortgage payments that will sink them financially.
While the loan is ill-advised for some, for others it has been a real blessing. The interest rate on my two-bedroom condo, for instance, is scheduled to “reset” this June at an annual interest rate of 2.341% fully amortized over a 35-year period. This means that my monthly mortgage payment will be $1,139.73. Try getting a mortgage loan of any kind with that phenomenally low rate.
Sure, my payment likely will go up every year for the next five years. However, my payment cannot go up by more than 7.5% annually. Thus, my $1,139.73 monthly payment next year could be as “high” as $1,225.21.
The option-arm does not come without risk. My rate is so low because interest rates have been low. It’s possible that five years from this June (or June 2015) rates will skyrocket, which will mean that I’ll have a difficult time securing favorable loan terms should I opt to refinance.
But I understand this and for five years have been preparing for leaner financial times. Indeed, because of my option-arm loan, I’ve been able to invest well and fully in my 401(k) plan and Roth IRAs. Thus, money that would have been spent on my mortgage has been invested instead in my retirement accounts. This has given me a considerable financial cushion and retirement nest egg. This is a financial tradeoff that I welcome in the future.
Unfortunately, because of the agenda-driven media, demagogic politicians, over-zealous regulators, skittish bankers, and misnamed “consumer groups” (read: leftist lobbies) consumers are being denied the same generous loan options and choices that I had when I returned as an Iraq War vet.
In the run-up to the 2008 financial panic, too many people took out too many loans that they could not afford. However, the answer to this problem, it seems to me, is not “financial reform” that will hurt consumers, (especially young consumers), but rather “personal responsibility.”