Smoldering the Fire - Handling Bad PR

Industry: Banking

What happens when a negatively slanted article is published in a national business magazine and your company's product is mentioned?

The Option Adjustable Rate Mortgage is a seemingly benign way to better manage one's monthly cash flow by lowering the monthly mortgage payment. (Read more on Option ARMs). However, if consumers had bothered to read the fine print, the introductory or teaser rates offered by banks and mortgage lenders are temporary; the rates, that is, lasting for 30 days up to a year. What is unfathomable to me are the greed and stupidity factors. People were refinancing their 30-year fixed 5.X% loan for a 30-day 1% rate? Inconceivable!

The alarming parts of that article are where "1.3 million borrowers took out as much as $389 billion in option ARMs in 2004 and 2005" and "Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings." It makes you wonder why the mortgage industry is relatively unregulated. There's already an estimated 20% shrinkage of the mortgage industry over the next 5-10 years. You'd think that it'd be in a company's best interest to not be so greedy as to push consumer risk to its breaking point. For now, banks and mortgage lenders are able to record phantom profits on their books because GAAP allows them to even when a borrower only pays the minimum amount each month. A lot of borrowers are likely to default on their loans, lose their property, or have to resort to a hard money loan to keep their property. It would then mean that consumer debt will skyrocket, leaving less disposable income to spend for durable goods, luxury items, travel, entertainment, etc. One would surmise that a recession is coming, maybe not today, but within the next five years. There's only so much in defaulted loans that any financial institution can really afford to have on its books. The ideal is to not have any at all.

(On a side note, I think now would be a good time to adjust my 401k to include bonds.)

So why consider Option ARMs if they're so risky? Rates not low enough? Did inflation stabilize? Was there really a cooling of the housing market due to rising interest rates or was it simply seasonally based? Consumers believe that the economy is continously growing, the housing market will always rise (maybe only in California, NY, or MA), and that their earnings will grow as they gain more work experience, responsibilities, college degrees, etc.

Washington Mutual's response to their lending practices: "Borrowers who request an adjustable loan with payment options should understand those options and potential adjustments throughout the life of the loan. We make detailed disclosures to customers that are designed to develop a more informed consumer of mortgage products and ensure that our customers are comfortable with the loan products they select."

WaMu's response is prudent and shifts the responsibility to the consumer, as it should be. Sounds fair, but is it enough?

For clarity purposes, I don't work for WaMu. And, I have yet to see what PR spins out of where I am. I'll update this post when I know more.
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