By Robert J. Semrad | Published March 31 2016 |
Financial Lessons from The Big Short
The Big Short, the Oscar-nominated film about the 2008 housing crisis, is an instructive, sometimes funny, and intense human drama about fraud and greed in the financial world. The film exposes the corruption that led to the near collapse of our banking system, but offers little comfort to the millions of Americans who lost their homes and/or their jobs due to that corruption. In fact, the film reminds us that the institutions at the center of the crisis received hundreds of billions of dollars in taxpayer assistance, and none of the Wall Street fraudsters faced criminal prosecution. But there are positive lessons that average Americans can take away from this film.
First, you should understand that mortgage brokers and loan officers are paid on commission. So, it’s often in their interest to sell a loan, even if it’s not in your interest to take it. The bigger the loan, the bigger their payday. It’s a good idea to have someone you know is on your side, like an attorney, go over the loan contract.
Second, be very skeptical of an adjustable rate mortgage (ARM), which increases in cost after the initial rate period ends. There’s some logic behind an ARM; younger borrowers who anticipate making more money as their careers progress can pay an affordable amount now, and accelerate payments later when the interest rate increases. An ARM might also make sense for a family buying a “starter house” that they don’t intend to remain in for more than five years. However, you can’t be unrealistic about your future earning potential or the future of the housing market. If you’re tempted to take out an ARM now, you should have a plan for dealing with the worst-case scenario: an exploding interest rate coupled with stagnant or decreased earnings.
Finally, the most urgent lesson of all is that the last housing crisis could happen all over again. Wall Street, having been shielded from most of the unpleasant consequences suffered by the nation at large, is up to its old tricks, once again issuing subprime mortgages. The Dodd-Frank reforms that Congress passed hastily didn’t really address the causes of the housing crisis, has not created a safer U.S. financial system, and is now widely regarded as a failure. Understanding that a second housing crisis is a distinct possibility should encourage any homeowner to stay within their means when taking out a mortgage.
If you’ve gotten into financial trouble due to a bad mortgage, DebtStoppers can help. Our bankruptcy attorneys know how to stop foreclosure and protect your home. Call DebtStoppers at 678-673-2142 or contact our office online to schedule a free consultation.