March 26, 2014

The Erosion of Trust

I met with a real estate agent yesterday and learned about a new strategy by the banks - if they feel that you "overpaid" for your new home, they can deny you the full mortgage amount, forcing you to either walk away from the sale or come up with the difference in cash.

At first glance, this might seem like a sensible way to keep exuberant buyers from borrowing more than they can afford to pay back. But at second glance, it's an obvious affront to our intelligence as consumers and a denial of our basic rights. And after a long look, it gets really ugly. Think about it. What this "new rule" effectively means is that you no longer have any control over your right to purchase your dream home. If Big Bank (aka Big Brother) doesn't agree with your negotiating prowess, they have the right to shut you down.

I can imagine how this happens. The bank tells someone to do an historic review of mortgage performances. Someone notices that defaulted mortgages sometimes represent bad initial investments. The owners walk away from the payments, and the bank realizes that the owner paid too much to begin with (according to the market, of course, which is the only way they evaluate property in the financial world). The bank also realizes that these large write-offs look bad on their books. So they devise a plan to "punish" all consumers, in order to avoid the few that created the problem in the first place.

This is called reactionary/protectionist economics, and it's happening more and more often. Unfortunately, it's happening in favour of the corporations, not the consumer. They feel perfectly within their rights to cripple us with a mountain of regulations to ensure that we don't cause them any loss of profits. As if.

We don't trust each other anymore. 
People don't trust their governments, their politicians, their doctors or their lawyers. We don't trust the news we read, the telemarketers trying to sell us something over the phone, or the big sign that says "Special Price One Day Only." We don't trust our bosses to tell us the truth, we don't trust our food sources, we don't trust our spouses to be honest, we don't even trust the babysitter any more.

Welcome to the world of the Internet, driven by data and fueled by fear. It's going to be a long millennium. Trust me.


  1. First, there is always a way to accommodate the bank's decision by making arrangements with the seller.
    Second, banks have a huge responsibility and liability insofar as keeping our financial security intact, one on which we relied during the last financial crisis, and if you didn't, should have been incredibly grateful to have. Without such oversight, we'd have been subject to brutal and devastating consequences for all,so ordinary people.
    This due diligence continues as the Canadian housing market continues heating. Just look at all the developers building condos, and for whom? Furthermore, if the banks don't use some of their judgment based on years of experience, you have a secondary and third market, as is the current case in the US, who offer their services as mortgage lenders. You have to rely on their reputation in order to deal with. Quite frankly, I'd prefer to deal with a Cda bank than an unknown dealer from God knows where. We"be evolved from the cowboy era.
    Third, as banks rely on your and my business to survive, they must have margins in which to manoeuvre. Negotiations happen between people, not institutions.
    Asserting that the banks infringe upon our rights leads us to a discussion on our constitution, and that goes on forever, costing time and money.
    Finally, people do and are overpaying. Houses, condos and apartments built with second-rate materials, deals made on the side with inspectors (corruption abounds), and developers themselves walking away with our deposits, well, it all adds up to the fact that it's about time the banks stepped up. You're right, it is a matter of trust.

  2. Adena, you make some valid points. I'm not denying that we need rules to protect us from corruption, and I'm glad that our government and institutions provide more oversight than others; it's always a grey area when it steps over into influencing consumer behaviour. Thank you for your well thought-out comments, and for reminding us that regulations have an important role to play.


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