Kannon Returns Fire: Consensus Insanity, Mortgage Style

Posted by LK on 1/27/09 • Categorized as Psychology, Return Fire, The Economy and Markets

Reference is made to the Kannon Fodder directly below, in which Wells Fargo is initiating a new program to bring montly mortgage payments down to 38% of gross monthly income:

When my wife and I applied to various pre-K’s for our kids the schools insisted on elaborate applications complete with parental essays, interviews with the parents, and “interviews” with the kids. I called it consensus insanity; I thought it was nuts, but everyone was doing it, so we did it too.

The authority figures (the schools), made the rules, so the rules were deemed valid, well thought out (except by the incorrigible Kannon), and worth obeying.

And here we have an authority figure (Wells Fargo) telling us about their new program in which they’ll help homeowners get their monthly mortgage payments down to 38% of their monthly gross income. Then 38% must be a righteous figure, because Wells Fargo says so. Right? Wrong.

Consensus insanity is building.

The gold standard, through stable times, has been a max of 28% of gross monthly income towards a mortgage, and no more than 36% of GMI towards total monthly debts, which would include mortgage, car payments, credit card payments, etc.

And now Wells Fargo is creating a new standard, which, if widely adopted, will inevitably lead to a boom and bust pattern of home purchases and foreclosures, as it’s still way above what has been deemed and shown to be manageable over the years.

It also makes clear how hog wild the greedy pigs in the real estate industry and its offshoots were allowed to run , from the lowliest local broker to the MIT PhD’s who created mortgage backed securities.

When the newly arrived at figure, which is supposed to ease the mortgage crunch, is a figure that would have previously led to the denial of a mortgage application, it makes us nothing more than credit junkie enablers.

Maybe it’s the Wells Fargo execs/credit junkies who need pre-K, or more probably, rehab. And the rest of us need the credit market version of Al-Anon.