We're going to be seeing a lot more stories like this as the Baby Boomers age:
Mr. Pyle’s suit contends that mortgage brokers and banks defrauded him by helping him take out loans they knew he could not afford, and that the person who bought his house deceived him by paying far less than its market value.Such theories have yet to be fully tested in court. And because many cases settle before they go to trial, in part because companies often assume juries will side with older victims, there is little precedent for how the laws should be interpreted.
As growing numbers of elderly consumers begin citing such legislation to undo contracts or get refunds, some companies and executives are warning of possible repercussions.
“Either someone has the mental capacity to make a decision, and therefore live with the consequences, or they don’t, in which case they shouldn’t be managing their own finances,” said Terry J. Dyer, president of Jett Financial Services, a defendant in Mr. Pyle’s suit. Mr. Dyer said his company, which helped Mr. Pyle refinance his home, did nothing wrong.
“There is no business on earth that can function if its customers can say, ‘I’m tired of abiding by this contract, so I want out because I’m old,’” he added.
For his part, Mr. Pyle wants to have it both ways — protection when he makes mistakes, and the right to make all his own decisions.
“It would be complete overkill to take away my independence,” Mr. Pyle said. “So I made a few mistakes. Twenty-five-year-olds make mistakes all the time, but they don’t lose their right to make decisions. I helped build this country. I deserve more dignity that that.”
Seniors are extremely vulnerable: they are often lonely, their mental facilities may be slipping somewhat, and they have large stocks of cash for con artists to loot. Mr Pyle was taken advantage of by a woman who sounds like a vile, vile human being; she played on his loneliness to get him to give her huge sums of money. Ultimately, he lost his house. To a greater or lesser extent, this is played out all over America every day.
But as the article makes clear, his problem wasn't that creditors improperly disclosed the terms of the loans; it was that he borrowed too much money. In effect, his lawsuit argues that he is not capable of making good decisions about his finances, and says the lenders should have done so for him.
If this sort of lawsuit is upheld, seniors will find it much more difficult to get credit, or indeed to enter into any sort of financial transaction. Businesses will not do business with people who can shed their contracts simply by declaring that they were, in retrospect, too old to make an informed decision. As the article notes, Mr Pyle wants to have it both ways: he wants the court to declare him too dimwitted to be responsible for his financial choices--but to leave him in charge of his own finances.
Are there no workhouses?
Has he no organs to sell?
If he was truly worthy of sympathy, Mr. Pyle would have mummy and daddy pay his bills for him.
Stupid old man.
Mr Pyle was taken advantage of by a woman who sounds like a vile, vile human being; she played on his loneliness to get him to give her huge sums of money.
Nice to see they named the woman Wendy McDonald in the article.
I read the NYT story
The man was not duped by lenders - he gave away about a half million to a younger woman who was stringing him along
a thoroughly dishonest choice posed by the mendacious NYT
Read the story - if you think it about lenders then you must be so incredibly naive you are a danger to yourself and others
Merry Christmas
Can you imagine the Times article reading this way:
Why shouldn't this work both ways? If he can get out of decisions he made because he is old, why can't I get out of bad decisions I made in my early 20s?
Steven, you can get out of most bad decisions you make when you are younger than 18. Which also means that, no matter how badly it is needed and no matter the ability to repay it, a 17 year old can't take out a loan without an adult taking responsibility for repaying it.
What Pyle wants is to have it both ways - to be accepted as a responsible adult until it's time to pay up...
You know, when people get taken by con men, straight-up grifters, they generally make every financial decision involved in the relationship willingly. And yet I believe there are ways of prosecuting con men, and this has not led to the collapse of the American credit system.
If somebody during the course of this relationship knowingly misrepresented the value of this gentleman's house to him, that constitutes fraud, no? The addition of the age factor seems like a bit of a red herring here.
you can get out of most bad decisions you make when you are younger than 18.
Yes, and when you are under 18 you are not legally an adult, and there are many things we restrict you from doing. I purposely said "early 20s."
We have entered an age where people want an "out" from bad decisions
if you get a house you can't afford using a highly structured interest-only resetting mortgage - hoping that house prices will climb enough to cover your a** - then if that doesn't work out you blame "predatory" subprime lenders
there seems to be a whole movement dedicated to supporting idiots like this - and this movement seem seems to include plenty of lawyers and republicans as well as the usual suspects
Merry Christmas, where's my present?
JoZef, the thing is, the people who were saying "This is crazy" when the housing bubble and ARM lending were in full swing (Paul Krugman, Nouriel Rubini, Atrios) are by and large not now saying "You took the mortgage knowingly, you deserve what you get." Instead, the people who felt the housing bubble was nuts, and didn't get taken in by the madness, are now the ones arguing that those who were gullible and greedy enough to get taken in should be cut some kind of break. Whereas the people who are now saying that people who are underwater on their mortgages should suck it up and face the consequences, appear mainly not to have believed that anything should have been done to puncture the housing bubble a few years ago.
Why do you think that is?
JoZef,
Exactly, if you take out the reason this guy was pulling equity out of his house (i.e. giving it to someone else) he was merely reselling it back to the bank and betting that either an improving market or his income could cover the note to buy it back. The bank of course also made the same bet and ended up getting a house that is worth less than the money they laid out. Who actually got the more screwed? The guy sold something for more than it's worth.
If people don't understand that a "second mortgage" is merely selling all or part of their house back to the bank, why the hell not?
If Mr. Pyle's putative girlfriend defrauded him, he has a cause of action against her. But frankly in terms of the loan itself both he and the bank made bad bets, and the bank came out worse off than he in the deal.
brooksfoe,
You may be correct at the higher political levels. However, the picture is a lot less clear at lower levels. See, for instance, thehousingbubbleblog.com, which is the go-to place for housing crash news, and the commentors of which had been correctly predicting a housing crash for years. Commenters there are 100% agreed on the mechanics of the bubble, but are split by party.
While we're discussing contradictions, how about politicians who call for "affordable housing" while doing their darndest to prop up bubble era pricing?
Good questions BrooksFor and BladeDoc
The housing bubble was as widely forseen as the I-net bubble - hugely and broadly so - so Krugman, Roubini et al are no seers. There is an unfortunate alliance of Dems and Repubs who are leading things like the "freeze" on ARM rates. Sheila Bair - Repub(?) head of the FDIC championed the freeze even though the banks participating in the freeze are only supposed to freeze rates on loans they sold to investors - if the ARM loan remains on the bank's balance sheet, they don't have to freeze. I guess the FDIC doesn't want the bank to forgo needed interest income but has no qualms screwing investors in the mortgage securities the banks underwrote.
The bank did make the wrong bet in the case of Mr. Pyle as BladDoc sez. If he put on his loan application that he'd use the proceeds to give to that friendly yound woman who keeps coming around, that should have given the banker pause - if the banker ever reads explanations for proceeds anymore. BUT - banks and investors are sucking it up. Dozens of mortgage companies have failed (seach Yahoo for mortgage implode-o-meter) and banks have written off billions. Serves them right but why should I as a bank shareholder or even as a bank customer now take lower dividends or pay higher rates to borrow because some moron took down too much credit. Let the money come out of the borrower's hide as much as possible, not mine. Why should we who save and invest (and pay obscene taxes) subsidize bums who bought more hows than they could afford or extracted equity based on ridiculous values?
Lastly, I was very active in housing finance in the 1990s (and 2000s) and well remember the drumbeat of pressure to lend to "underserved" communities and make them homeowners. The Clintons were big advocates of homeownership schemes and new technology was supposed to enable lenders to sort out and "risk-based price" new and non-traditional borrowers. Bankers were pressured to consider if a welfare mom had a history of aying her cable bill on time (I kid you not). As a (well-off) renter without cable I see a cruel irony in all this.
Brooksfoe -
It's interesting that you think that there's a contradiction - some people didn't want the government to control prices during the 'bubble', and those same people don't want the government to selectively enforce only some contracts now. The only type of logical consistency that you seem to recognize is for people to favor either the government stepping in earlier, or the government stepping in now (or both, of course). To say that the government shouldn't micro-manage at any stage in the process - well, that's just crazy talk.
I suspect a lot of mortgage contracts could be described as something between negligent and fraudulent. Lenders, brokers and underwriters either knew or should've known that a lot of these loans were unlikely to be repaid. Maybe the borrowers lied on the application. Maybe they lied with encouragement from the underwriter.
Torts and contracts have evolved to the point where full disclosure is the new fraud. The credit card agreement is the perfect example, with mortgage underwriting a close second.
Lenders, armed with the collective wealth, knowledge and experience of large corporations, write ridiculously complex contracts to indemnify themselves against every lawsuit that's ever been filed. While everything is fully disclosed, the intent to deceive lies within the layers of multiplied complexity. Lenders bank on the knowledge that many people won't understand what they're signing.
Thus, a credit card agreement is just a roundabout way of saying we can charge you any fee or interest rate we want, at any time, for any reason. Mortgage contracts become a roundabout way of saying we'll let you pay us for a while, before we kick you out of your house.
It's easy to wonder how a person could be so foolish to sign such a thing, but rest assured: the lender knows exactly how. How old and dumb this man was is near irrelevant.
Ann,
some people didn't want the government to control prices during the 'bubble', and those same people don't want the government to selectively enforce only some contracts now.
I'm not saying this position isn't logically consistent, but in this case, at least, it seems to lack any utilitarian justification. That is, it seems to have been shown to be an approach which led to tremendous financial hardship for many banks and homeowners, and which has brought upon us a risk of a breakdown in the global financial system and a severe recession. I understand that libertarians and laissez-faireists don't want government intervention in the market under any circumstances. But in this case, there has been, in fact, no government intervention, and the result has been precisely what a Keynesian would predict: irrational mob behavior in the market, and a severe boom-and-bust cycle. If you wanted no government intervention, then it seems that the coming recession is what you wanted. So...can you remind me why this way of handling the relationship between the government and the economy is supposed to be superior?
Thus, a credit card agreement is just a roundabout way of saying we can charge you any fee or interest rate we want, at any time, for any reason. Mortgage contracts become a roundabout way of saying we'll let you pay us for a while, before we kick you out of your house.
No, both of them are ways of saying "You're borrowing a bunch of money and you have to pay it back." All the nasty consequences kick in when you don't pay.
This is not a difficult concept to understand, regardless of age.
brooksfoe-
But in this case, there has been, in fact, no government intervention,
Really? None?
What about 1% Fed rates? How about the Federal tax deduction for mortgage interest? Or the "Capital Gains exclusion" for owner-occupied homes?
How about Fannie Mae? Or "red-lining investigations"(thus encouraging lenders to offer these riskier products to their riskier buyers)? Was Greenspan hyping ARMS in 2003-2004 a "gov't intervention"?
What about 1% Fed rates?
You consider the existence of the Fed to be "government intervention"? Or are you saying the rate was set too low, and should have been higher? If you're saying it should have been higher, then you, too, are arguing for "government intervention".
How about the Federal tax deduction for mortgage interest? Or the "Capital Gains exclusion" for owner-occupied homes?
Mortgage interest did not suddenly become tax deductible in 1995, nor did capital gains on owner-occupied homes suddenly become excludable. Rule of logic: You cannot invoke a constant to explain a change. Ditto for the existence of Fannie Mae.
There may be an argument on the question of government encouragement of homeowner loans to lower-income clients, but from what I've read this is not a major factor behind the current crisis; the problem is mostly lending to people with bad or overextended credit, or simply on properties that had already sharply inflated, in many cases for speculative purposes. As for Greenspan hyping ARMs, I think a verbal statement by the chairman of the Fed (which is not, strictly speaking, a branch of government) is at most a very marginal form of "government intervention", but basically I agree: I don't generally think a Fed chairman should be involved in hyping products for the financial industry, and that was unconscionable. But I think there is a fundamental difference between the government HYPING an industry product, and the government WARNING OF THE RISKS of an industry product. It is significant that putative apostles of market freedom, like Greenspan, seldom seem to have a problem with the former, but would never dream of doing the latter.
"a risk of a breakdown in the global financial system"
Are you serious? Are you claiming that this is bigger than, say, the S&L Crisis? Actually the S&L Crisis is a good example of what government can do to encourage ever greater problems. You might argue that that was an example of 'bad' government, and you're only arguing for 'good' government intervention, but how do you guarantee that bureaucrats and politicians with poor incentives will always rise above all that and have the wisdom, strength and courage to go against their own short-term interests?
"So...can you remind me why this way of handling the relationship between the government and the economy is supposed to be superior?"
Because government often gets it wrong, and government action is phenomenally undiversified and thus can lead to spectacular mistakes. 'The market' makes mistakes also, meaning that people make mistakes with or without the full strength of government forcing their mistakes onto others, but hopefully people learn from their mistakes, and at least individuals have more of an incentive to try to get it right.
I just don't believe that political, career-minded bureaucrats should have too much power. Yes, people make mistakes, but at least they (hopefully) expect to be responsible for those mistakes and thus put some effort into getting it right. And if they don't care enough to get their own finances right, why should the rest of us be punished in order to reward their inattentiveness?
If banks know that they won't be bailed out, most of them will learn. If people know that they won't be bailed out, most of them will learn. And most of them learning is the most that we can hope for, since people are fallible and often lazy. That doesn't seem to be an argument for putting more power into the hands of a small number of fallible, possibly lazy and/or possibly politically-motivated people at the top. If we can't have a fool-proof system, we should at least diversify and give everyone good incentives.
The financial markets appear to believe this may be bigger than the S&L crisis, and it certainly involves a much greater problem of non-transparency -- not knowing where the bad loans are. That's why it has led to a choking of credit in markets around the world, not just the US. Beyond that, I agree that the S&L crisis was an example we should continue to learn from: S&L's enjoyed exemptions from government regulations that applied to other banks, and they went ahead and loaned out huge amounts of money on bad speculative land investments. Surprise -- this is what lenders tend to do, left to their own devices. Far from "bailing them out", the government eliminated their industry and put several of them in jail; and yet the next crisis was just 20 years away.
I don't know that bureaucrats will always make good decisions. But I do know that pure laissez-faire market systems will always lead to sharp, painful boom-and-bust cycles. It's been the case throughout the history of capitalism. In the 1800s and through the 1930s, the busts were so painful that people starved, or sold themselves into the company-store equivalent of debt bondage. What we and every other advanced economy in the world have now is a complicated and sophisticated hybrid public-private economy which has tools that can address market failures and which is to some extent responsive to the nation's political desires (one man = one vote), as well as its consumer ones (one billionaire = 1000 millionaires).
A modern economy cannot function without a strong and effective state. Given that fact, it is a priority that the state act wisely. The subject under discussion in the political sphere should be the wise course of action for the state, not the existence of the state.
No. If that were the case, then married couples in the UK wouldn't be able to get mortgages, because of our undue influence laws. What actually happens is that because lenders really like lending money, they satisfy themselves that neither borrower is being unduly influenced - what happens is that borrowing costs more.
That's what happens in a market when insurance (in whatever form) is available, because not every market is a market for lemons.
It's a tricky issue. I started reading the NYT article expecting to agree with Megan, then I hit quotes like this:
“It’s clear he was living beyond his means, and he might not be able to afford this loan,” said Mr. Dyer of Jett Financial. “But legally, we don’t have a responsibility to tell him this probably isn’t going to work out. It’s not our obligation to tell them how they should live their lives.”
I don't know. There's already so much legally required disclosure with property loans than I suspect that borrowes just tune it out, but I'm generally in favor of disclosure requirements. If Jett Financial is writing loans that are almost certain to end with them owning the homes, my first instinct would be to make them disclose it. I'm also not crazy about the mortgage broker offering to buy the house personally.
That said, I am sure that Jett had to give this guy documents that said that he would be paying $2,200/month on the loan, and that it would take him umpteen years to pay it off. I don't know.
Greenspan hyping ARMs?
Hardly
he did point out that most consurers have historically been better off with an ARM - AND STILL ARE
Now, is you borrow 100% of the value of an overpriced house and your CREDIT SUCKS so you have a high margin ARM , that is an entirely different story - that does not undo Greenspan's asserting which was hardly government intervention
The problem is not the ARM, it is people buying houses they cannot possibly afford even with a FRM that was priced to cover their(huge) credit risk
I'll also add that there are settlements that would not drive up costs very much, such as lenders asking people about income (which they do already) and their circumstances (which they do) and showing the borrower a calculation indicating their ability to repay.
I generally agree, Martin, with a couple qualifiers.
1) I don't know if you've financed in the last couple years, but there are already about 15 pages of disclosures the lender is required to show you. I don't have a problem with adding one more, but I know I was starting to tune out with the stuff they already have, and adding more will just make it worse.
2) More disclosures probably wouldn't have helped Mr. Pyle, the guy at issue in this article. At the time he spoke to the first of the brokers he is suing, he was apparently about $300,000 in debt.
I'm sure they disclosed to him that he would be paying $2,200 a month after the refinance, but I'm not sure that they could have done much more than that, given that (a) Pyle didn't want people to know that he was giving money to his neighbor and (b) he wasn't even balancing his checkbook.
I guess you could require people to have a financial counselling session/mini-audit before they finance. It would raise the costs of borrowing for people required to go through it, but might help more people than it hurts. Certainly, it would have helped Mr. Pyle, if it had allowed someone to figure out and tell him that he was at the losing end of a multi-year fraud scheme.
Whoops, I mean "Marcin," not "Martin." Sorry!
)I don't know if you've financed in the last couple years, but there are already about 15 pages of disclosures the lender is required to show you. I don't have a problem with adding one more, but I know I was starting to tune out with the stuff they already have, and adding more will just make it worse.
Actually, I recently took out a secured auto loan for less than $5k from my bank. The documentation ran over thirty pages and required me to sign in four different places throughout in the banker's presence, and the bank's lending arm holds the physical title and lien to the vehicle until the loan is repaid.
About four months prior to applying for that loan, I applied for a credit card from the same bank, and that required all of a phone call and a single piece of paper that I had to sign and return. I was prequalified based on my account history and the initial credit limit was well over $5k; it has been rising ever since based on good credit behavior. Every week I get one or two similar credit card offers from another bank with whom I have never done any business at all.
There's something pretty screwy in all of that...
AM,
The difference is simple: because they can take your car and do so in many instances, there is political pressure to make the car loan process "fair" to the helpless consumer who would be inconvenienced if they couldn't drive the car they aren't paying for. Hence, disclosure and "consumer protection laws."
Since their recourse if you don't pay credit cards is to send nasty letters until you file for bankruptcy, there is no political hay to be made.
What's amazing is that the irresponsible non-payers lobby (aka Big Deadbeats) is effective enough to get legislation passed over the objections of Big Credit; you'd think people who don't pay bills would have more trouble organizing.
The moral of the story is obvious. We need to prevent single mothers from associating with old people, so they don't bilk the poor old people of all their money.
But I do know that pure laissez-faire market systems will always lead to sharp, painful boom-and-bust cycles.
What was that you were saying earlier about not invoking constants to explain change? Was there a Laissez-Faire in Lending Act of 1995 that I haven't heard about?
I just came across this reproduction of the article that the NY Times printed.
Please note that Jett Financial did NOT do the loan that contained the terms referenced in this article. Just a few short months after Mr. Pyle closed his loan with Jett Financal Servces, Inc. (getting a fixed rate not an adjustable) he went and got a hard money loan someplace else. This subsequent loan had a rate of 11.5% and a payment that exceeded Mr. Pyle's monthly income.
I made this point clear the Ms. Stebner and Ms. Fish (attornys for Pyle) but in attorney fashion they apparently have just decided to sue everyong (except the company that did the loan). I know this sounds rediculous and as hard as it might be to believe I even sent the attorneys copies of the recorded documents to prove that we did not do the loan which was referenced in this article.
You would think that these attorneys have some dute to people that they sue to not just sue out of maliciousness but that seems to be the case at this point.
I also provided the public records to the writer of the article who failed to respond.
Best
Terry Dyer
President
Jett Financial Services, Inc.