"Does it pay to play by the rules?

"Does it pay to play by the rules?
By Jay MacDonald • Bankrate.com

Everywhere you look these days, someone is being rewarded for bad behavior.

Wall Street bankers, hedge fund managers, mortgage lenders, even homeowners who knowingly bought homes they couldn't afford -- all have abandoned the moral high ground and are now heading down to bailout town, where the fat cats dine.

With bailouts seemingly blowing in the wind, it's hard not to feel like a chump for being fiscally responsible.

Does it still pay to play by the rules?

Peter Schiff, president and chief global strategist of Connecticut-based brokerage firm Euro Pacific Capital, believes government policies are undermining people who behave well, while rewarding those who are irresponsible.

The government is sending out the wrong message by letting everyone involved in this financial folly -- lenders and borrowers alike -- escape the consequences of their actions, says Schiff.

"People say, 'Oh, this isn't fair that people have to suffer,'" he says. "Well, yes it is; they made their bed, now they have to lie in it."

No price to pay
Schiff is author of the 2007 book "Crash Proof: How to Profit From the Coming Economic Collapse." He was among a handful of pundits and economists who correctly forecast the current financial meltdown.

To illustrate his argument for how the government rewards bad behavior, Schiff cites the example of the Streamlined Modification Program, or SMP. The SMP is a recently implemented joint effort on the part of the private sector and the federal government to bring mortgage payments for some delinquent homeowners to below 38 percent of monthly household income.

“What the government is saying with the bailout is, 'be irresponsible, be reckless, and you'll get rewarded.'” Under the SMP, struggling homeowners who are 90 days or more late on their mortgage payments -- and whose loans are owned by Freddie Mac, Fannie Mae or participating lenders and servicers -- are eligible to have their loan restructured to reduce their monthly mortgage payments. Restructuring could include lowering a homeowner's mortgage rate and increasing the length of the loan term to up to 40 years.

"If by not paying your mortgage for three months you could qualify for a mortgage modification that would lower your mortgage payment for the next 30 or 40 years, wouldn't you at least be tempted?" Schiff asks.

Life's rules say that if you earn and save, one day you'll be able to buy a house. But Schiff notes that under the SMP's goal of reducing mortgage payments below 38 percent of gross income, the less you earn, the lower your mortgage payment will go.

"What does that say?" he asks. "It says that if I'm earning $100,000 a year right now and can cut my income to $50,000 a year, my mortgage payment is going to be half as much. Over a 30- or 40-year mortgage, that could be a $500,000 to a $1 million handout."

It is important to note that as part of SMP, homeowners whose mortgage rates are cut especially sharply early in the program could see their rates increased somewhat after a set period of time.

Proponents of the SMP also argue it has provisions to discourage opportunists. Homeowners must provide proof of having suffered a hardship, such as a job loss. Those who participate in the program also must sign a form stating that they didn't deliberately default on their mortgage simply to qualify for the benefit.

"But you're talking about people who already lied on their mortgages in the first place by exaggerating their income," Schiff says. "So why wouldn't they lie here?"

Usually, a failure to pay your mortgage lowers your credit score. But with a loan modification, Schiff says, "you'll probably have a higher credit score because now your debt-to-income ratio when you start repaying is going to be a lot better.

"If your mortgage gets cut in half, you're a much better risk than an idiot who is struggling to make his mortgage payment."

Schiff is convinced that angry homeowners will queue up right behind the victims of predatory lending in hopes of landing their own mortgage modifications. He's especially frustrated by the thought that the program could benefit unscrupulous lenders who created the subprime mortgage mess in the first place.

"You're going to have all these mortgage bankers who have nothing to do cold-calling the country, trying to encourage people to qualify," he says. "Instead of encouraging people to exaggerate their income, now they're going to lie to minimize their income."

Faulty assumption
However, Charles Geisst is not so sure people will exploit the government's good intentions.

"That was the same assumption used to revise the bankruptcy laws a few years ago, that people were taking advantage of bankruptcy and using it as a tool. I don't think so," says Geisst, professor of finance at Manhattan College in Riverdale, N.Y., and author of "Undue Influence: How the Wall Street Elite Puts the Financial System at Risk."

"I'm sure some did (take advantage), but I think it was just a matter of people being in over their heads and not realizing it," he says.

Kathleen Day, spokeswoman for the Center for Responsible Lending in Durham, N.C., believes it's wrong to point the finger of blame at borrowers who have fallen into a pit of trouble and are now looking for help to climb out.

“If anyone thinks that they're an idiot for acting responsibly, just look at the mess we have.” She says no one in their right mind would join in the subprime debacle voluntarily.

"If anyone thinks that they're an idiot for acting responsibly, just look at the mess we have," she says.

In fact, she says, the majority of people who took out subprime loans actually have played by the rules and acted responsibly, despite a widespread perception to the contrary.

"Were there some outliers? Sure," she says. "But just looking at the mortgage market, 90 percent of the people who got subprime loans live in their homes, and six out of 10 who got a subprime loan in 2006 had a credit score that would have qualified them for a traditional, lower-cost loan."

If anyone has failed to play by the rules, it's the lenders, she says.

"It's not the people who took out this debt, it's the people who gave it to them who weren't playing by the rules through irresponsible underwriting."

Do the right thing
Even if bad behavior is being rewarded, there are compelling reasons to play by the rules, according to Bruce Weinstein.

"The reason to do the right thing is simply because it is the right thing to do," says Weinstein, author of "Life Principles: Feeling Good by Doing Good."

Weinstein -- a professional ethicist known by the moniker "The Ethics Guy" -- says individuals should not adjust their moral principles simply for financial gain.

"If it is wrong, for example, to run up a huge personal debt without having the means for paying it off, then it's still wrong even if 100 or 100,000 other people are doing it," he says.

As our parents tirelessly explained, moral rules exist for a reason.

"Imagine what our society would become if we created moral rules not on the basis of their inherent rightness or wrongness but by how a lot of people actually behave," he says. "By this line of reasoning, we would have to say that lying, cheating and stealing are ethically permissible or even laudable. This, of course, is ridiculous."

For her part, Day argues that bailouts don't reward irresponsible behavior as much as people think. A mortgage modification is nothing to covet, even for profit, she says.

“The reason to do the right thing is simply because it is the right thing to do.”"It is no picnic to get in line to seek a loan modification," she says.

Day insists that homeowners who receive a loan modification are "not being bailed out." Instead, they are receiving a new mortgage rate they can afford.

"They're not even going to be given the rate they should have been given; they're just going to be given rates they can afford, which may or may not still be more expensive than they should be," she says.

In addition, a mortgage modification comes with a heavy price for borrowers in that it is likely to hurt their credit, she says.

"You don't want to ruin your credit rating and then be subject to real loan sharks," Day says. "That is not a bargain."

However, Schiff insists the advent of Bailout Nation increases "moral hazard," the concept that ignoring -- or worse, bailing out -- bad behavior only serves to encourage it in the future.

That sends a dangerous signal to people who have played by the rules in the past, Schiff says.

"What the government is saying with the bailout is, 'be irresponsible, be reckless, and you'll get rewarded; be responsible, and you get punished because you'll have to pay for all the irresponsibility of everyone else,'" he says.

"You can't have a society like that. It won't work."

Jay MacDonald is a contributing editor based in Texas."

[Dantheman62]

Good article.....but rules were made to be broken!

[Dantheman62]

Here's my story...two and a half years ago I put my house up for sale in West Palm Beach, FL and decided to move to north Georgia and start a new commercial painting business, which I previously did in Florida for 15 years.

So I came here and found a house and went to the lender and they asked what my income was, I told them that I am new to the area and am starting a new business. They asked what my income is and I said I had none but I expect to make between 60 and 80 thousand a year based on previous experience in the painting business.

He says no problem, sign here and enjoy you're new home and welcome to the area! Now I had no proof of income!, had no job!, still had my house for sale in Florida!, and he says sign here.

Then the economy took a dive and that ended that!, I did sell my house in Florida finally, but now I'm in north Georgia, no job, bad economy, and stuck with a $240,000 dollar house and two months away from bankruptcy and foreclosure!

So am I to blame for signing the paperwork in a still good economy?, or are the lenders to blame for being so lax on their rules?

Oh, and what have I been living on for the last two and a half years?, Well I sold my $130,000 dollar house in Florida for $305,000! so after paying off my credit cards and what not, that's been what I've lived off of. (Also sold all my toys, Motorcycle,Jet Skies,Fast Cars,blah,blah,blah!)

[Avid]

Originally Posted by Dantheman62

Here's my story...two and a half years ago I put my house up for sale in West Palm Beach, FL and decided to move to north Georgia and start a new commercial painting business, which I previously did in Florida for 15 years.

So I came here and found a house and went to the lender and they asked what my income was, I told them that I am new to the area and am starting a new business. They asked what my income is and I said I had none but I expect to make between 60 and 80 thousand a year based on previous experience in the painting business.

He says no problem, sign here and enjoy you're new home and welcome to the area! Now I had no proof of income!, had no job!, still had my house for sale in Florida!, and he says sign here.

Then the economy took a dive and that ended that!, I did sell my house in Florida finally, but now I'm in north Georgia, no job, bad economy, and stuck with a $240,000 dollar house and two months away from bankruptcy and foreclosure!

So am I to blame for signing the paperwork in a still good economy?, or are the lenders to blame for being so lax on their rules?

Oh, and what have I been living on for the last two and a half years?, Well I sold my $130,000 dollar house in Florida for $305,000! so after paying off my credit cards and what not, that's been what I've lived off of. (Also sold all my toys, Motorcycle,Jet Skies,Fast Cars,blah,blah,blah!)

Oh bless! No - you are not entirely to blame - you started in profit.
This is the criminal banksters that must be made to make reparations, instead of laundering their ill-gotten gains abroad.

There is a moral to this story - the 'succered' society by the greedy. We really ought to save, and not rely on credit. Their credit 'web' was our trap.
Who does this to people...? It's historic. Disgusting.

[Dantheman62]

Thanks Avid, and yes I am finished with the American credit game and no longer will participate! I'm finished with the whole credit score system, the good credit-bad credit game that runs society! It's a joke, and I'm not laughing any more!

[Orion11]

"Does it pay to play by the rules?

no, not really... not with the 'rules' these folks make up.
they only make these rules to cover their own asses,
not for the good and safety of everyone else.

but it does pay to use our intuition and wisdom to decide what rules to throw out the window and laugh at... never to pay them mind again.

it will all work out, regardless.
<3

[Avid]

SAY NO TO USURY

[Myplanet2]

Cool thread.

I thought Cliff High did a good job addressing this issue on "Journeys with Rebecca" radio show or podcast.

He said basically that all you can really control is your own attitude about all this.

Banks and governments will eventually collapse under their own weight, as will anything based on any sort of "continuous expansion" model. When it can no longer expand, it can never maintain a stasis. It has to contract.

Things like social security, and universal health care seem based on continuous expansion models. Always mortgaging the future for instant gratification in the now.

Cliff said it makes more sense to surround yourself with people who will be able to deal with what's coming in our near to middle future, as adults. With the willingness to deal on the level of personal responsibility. This was in regards to people getting really upset by the betrayals on their entitlements. They're just not likely to be there. So his opinion was that there is no point getting all twisted about it, because it's now history, and all you can really bring is your good attitude, and all you can count on is what you can provide right now with your personal responsibility.

When asked about whether people should continue to pay on their credit cards and mortgages, he said basically that there would come a time when requests/demands for payments on the cards or mortgages would simply stop coming and then there'd be little point in continuing to try to pay on them. It'll be fairly obvious when the time comes.

Until then, you risk some attempt at enforcement activity from the financial institutions.

My own view is that this whole fake money loaned for interest paradigm is going to completely collapse, to where there is not even a hint of it remaining.

real and true exchange will be the new paradigm. Value for value. None of this "taking a cut" on other peoples labours.

[voltron]

Good thread. I am 67 years old. I make $2000 a month on part time labor plus social security retirement. I have no checking account. I owe 2 years on my car, but that is all the debt I carry. Otherwise I am on a cash basis. I have been very happy to watch the stock market fall. It is wrong to begin with. Why should we borrow money from the Federal Reserve which is owned by private bankers. The sooner it fails the better. We do NOT need more credit. any company which needs to borrow money to stay solvent is wrong anyway. Paulson, Bush, et. al., deliberately bankrupted us Americans. It is part of a deliberate plan. They did what they were supposed to do. They would not even let congress put anything in the bill for $700 billion to help the average person.
A few billion would bail out every mortgage holder in america. Bush said he would veto the bill if congress did anything for the voter. You can buy General Motors for $1 billion. That is when I gave up thinking the Bush administration would ever change its ways. We are all going to have to suffer for what a few beasts (they are not humans) have done to us.
As far as playing by the rules, I always have but recently I wish I had gone for more money. Not in a corrupt way but just making a confortable living. $35 or $40 thousand a year instead of living on minimum wage most of my life. Thanks for listening, Voltron