Goldilocks

We all know this story, perhaps better than any other fairy tale. When Goldilocks tasted the porridge, one was too hot, one was too cold, and one was just right. What Goldilocks was seeking was a comfort level. So should you.

A key element of my working with clients is helping them to seek a comfort level about some financing scenario. My experience is that people will not sign the loan docs until they are comfortable. So my job is to take each element of the transaction, break it down into its elements and discuss it with them.

Just as in the case of Goldilocks and her porridge, some loans appear too risky, some are too expensive, but there is one out there – our job is to find it – that is just right.

Getting a mortgage isn't like tasting porridge. It’s easy to tell if porridge is too hot or too cold, but selecting a mortgage properly is more complex than that. When people go through this by themselves, the almost invariably start out over-simplifying the process, or with inaccurate assumptions, or both. Those errors color the rest of their thinking so that they cannot go through the process rationally.

When they over-simplify the process, they think that it’s easy for them to do it themselves. Only yesterday I talked with a homebuyer who was referred to me by her parents, who had ready my book. I chatted with her, but, in spite of the fact that she was horribly confused, perhaps even being misled, she was unable to admit that I, as an expert, might possibly be able to help her. Having helped thousands of people in her situation, I know that I can help her too, but without her acknowledgement that she needed that help, we have no basis for a business relationship.

The other mistake people make is that they start out with a rigid assumption about a loan product and are unwilling or unable to consider alternatives. That’s what I call “Ready! Fire! Aim!”

Almost invariably they choose what I call the Loan du Jour, the loan that gets written up in the papers or that everyone is talking about. In the old days of pure Adjustable Rate Mortgages, everyone started out thinking they wanted a loan tied to the highly-advertised 11 th District Cost of Funds. Later, all people wanted was a 30-year fixed rate loan. Today, interest only loans are all the rage, as was the case with this young lady.

If they were being perfectly honest about themselves, if you asked them, “Why do you want this loan?” they’d give you a silly answer because the fact is that they really do not have a rational basis for that assumption. In too many cases, people say, “It sounds good.” Whoa! This isn’t music! All “Sounding Good” really means is that the marketing yahoos tweaked the pitch until to appealed to focus groups, then turned their people loose on you.

My first job in counseling them, therefore, is to un-sell them and get them to open their minds to other possibilities. We want to start out with a clean slate. Again, most people cannot do this on their own because they do not know how to do the mathematical analysis to compare alternatives. I can do this because I’ve done it 3,000 times.

When my clients and I go through the process we may very well end up where they started out, but we will have ended up there because we analyzed their goals and found the loan that best helped them meet their goals.

If you ask them later why they chose that loan, or why they may have chosen to pay points, or why they locked in when they did, they won’t tell you it’s because it sounded good. They will tell you that, like Goldilocks, we went through a rational process, tested the alternatives, and finally found something with which they were comfortable.