Beware the balloons

Some industries are more deserving of regulations than others.

Among those are industries related to shelter. When it comes to the shelter we provide for our family, some business practices should not be allowed.

I worked in the mortgage industry in the late 1990s. I saw borrowers sign up for balloon mortgages to buy homes they could not afford. Many of them barely spoke English and had little education. It was safe to assume that many would default on — and be surprised by — the $50,000 balloon payment that was due 10 years later. The 2008 mortgage crisis didn’t really come as a shock to me.

The current power crisis in Texas highlights a similar problem. Homeowners have been lured into “low-cost” electricity contracts where the price of the electricity is not fixed but tied to the demand. People who paid $250 in January for an entire month of electricity were paying $1,000 a day last week when demand peaked. Many admit that they didn’t fully understand the contract they signed. Like the balloon mortgagees, they were distracted by the low cost of entry.

In an ideal world, a sales person would say “Listen. We have this electricity contract that is really attractive at first. But it forces you to save a ton of money on the side, for when you’ll have to make a huge, unexpected payment. Most people can’t save that much and they regret their decision. So, quite frankly, I strongly recommend you don’t buy this product.” In fact, in a really ideal world, companies would decide to offer these products only to sophisticated customers with large liquidities, not to the average Joe.

Until we live in that world, regulations are in order.

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