Personal responsibility in the mortgage debacle

Since the 1950s there have been warning labels on cigarettes making it clear that smoking is bad for us. There have been ad campaigns, public service announcements, educational films, not to mention a lot of high profile law suits against the tobacco companies. Yet as the first decade of the 21st century nears an end, there are still octogenarians filing lawsuits claiming they didn’t know that puffing down a daily pack or more for sixty-five years might cause a health problem or two. I have no great love for the tobacco companies, but gimme a break! How about a little personal responsibility!

So what do cigarettes have to do with personal finance? Everything! Today in the US we’re facing one of the worst financial meltdowns since, arguably, the crash of 1929. Liquidity has all but disappeared; paragons of the financial world are going up in smoke – no pun intended; and politicians are creating all manner of knight-in-shining-armor plans to protect the American debtor from…from what? From their own irresponsible behavior.

I ask you, where is the personal responsibility? If I buy a house I can’t afford, and take out a loan I can never pay back, why should I expect the government or corporate America to bail me out? Yes, it’s true, the mortgage industry and Wall Street carry plenty of blame for being blinded by greed and creating all sorts of mortgage backed products that even they don’t seem to understand, (the Frankenstein monster gone wrong) but is there anybody surprised by that today? The average American consumer invests 400%-500% more time planning a vacation than evaluating their financial decisions, and a mortgage is by far the largest financial transaction most Americans will ever make. I’ve been working in real estate finance for over ten years and shockingly few residential borrowers, even the most educated and business savvy, have any real interest in understanding the full implications of the loan they are taking. Their only real concern is “what’s my payment next month?” We got addicted to easy money, and when a meth lab blows up nobody should feel sorry for the cook – he knew the risks he was taking.

Anybody with children knows all too well that if you don’t teach them to be responsible for their own decisions you’re going to end up with some pretty messed up kids. If there are no real consequences for bad behavior that behavior will never change. This is equivalent to American consumers expecting a paternalistic government to step in save them from their own bad financial decisions. Yes, losing your home or filing bankruptcy is tough duty, but certainly not life threatening. Besides, what the press rarely talks about is that all these foreclosures are not resulting in legions of new homeless people across the nation. They lost their homes because they made very bad financial decisions, not because they lost their job. So now they’ll go rent a home for a while, and when they’re ready to buy a house again maybe they’ll think beyond next month’s payment before signing on the dotted line.