Fraud and the Seven Stages of Grief

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During my careers as a fraud investigator and financial counselor, I’ve made an observation.  Whether it’s a victim of a financial fraud or a client with massive debt, both individuals go through the Seven Stages of Grief. These stages are typically felt when losing a loved one to a terminal illness, but I also have seen people go through them when victimized by a con-man or battling bankruptcy.  The feelings of shock and denial are most pronounced, and these feelings typically contribute to the fraud’s progression.  Let’s take a look at a few historic examples to illustrate my point:

  1. In 2000, a man named Harry Markopolous warned the Securities and Exchange Commission (SEC) that well-respected money manager Bernie Madoff was running a Ponzi scheme.  He made several more warnings, but the SEC ignored him. Madoff’s scheme finally collapsed in 2008.
  2. David Walsh, an Irish journalist, made countless claims over a decade that Lance Armstrong used performance enhancing drugs to win the Tour De France seven times.  Armstrong went on the offensive, ridiculing Walsh and anyone else who opposed his narrative. Armstrong eventually admitted to Oprah and the world that he cheated during all of his races.
  3. Retired FBI Agent John O’Neil fought a ten year battle with the bureau over Usama Bin Ladin, but he couldn’t convince his superiors to take the terrorist threat seriously.  He left the FBI to become head of security at the World Trade Center and ultimately lost his life on 9/11. O’Neil’s story still teaches us the ultimate consequence of shock and denial.

As bad as these events were, they pale in comparison to the one that’s coming.  The biggest fraud taking place right now is being conducted by the Federal Reserve. Just like Markopolos, Walsh and O’Neil, several brave heroes are trying to warn the American public of an impending economic collapse. It should come as no surprise that they’re usually confronted with shock and denial.  The most outspoken hero is a man named Peter Schiff, and as you can expect, he receives the most ridicule and disdain by the mainstream news media.

Even an armchair student of history can see that humanity repeats the same mistakes over and over, and it is largely due to the first two steps in the Stages of Grief. America’s Greater Depression ahead is eventually going to leave many citizens angry and depressed, but we will all eventually reach acceptance. My hope is that we can help people reach that final stage before it’s too late.

Super Bowl 50: A Consumer Case Study

One of the worst commercials of Super Bowl 50 had nothing to do with beer, cars or shaving. It was a commercial from Quicken Loans touting their new “Rocket Mortgages.” For a financial counselor, this commercial instantly made me nauseous. The ad suggested that getting a mortgage should be as easy as ordering a pizza. After you have that brand new overpriced house, it needs to be filled with brand new expensive artifacts. Those artifacts are made by low wage hourly workers who will in turn also buy an overpriced house an attempt to fill it with credit card purchases. The whole disgusting cycle repeats itself until one day someone realizes that their brand new house is falling in value. Instead of mailing in a check, they send their keys instead, and the whole house of cards comes crashing down.

This was the playbook that brought about the 2008 financial crisis, and it’s happening all over again.  Memories are short in the United States, and no one wants to ever focus on the lessons of austere times.  That is why the exact same mistakes are being made all over again.  Fortunately, for most parts of the country, housing prices seemed to have topped and are even falling in some metropolitan areas. Here in Northern Virginia, some homes have been sitting on the market for months without an offer.  Many other homes have been reduced, but not by an amount that will lure renters back into the “dream of home ownership.”

My family has been renting for the last two years since we sold are starter home for a handsome profit.  We just signed another 18 month extension, and locked in our original monthly rent of $2,750 a month.  Why does this matter? Well, our neighbor just listed his similar home for $639,000.  Assuming he gets his asking price (which I highly doubt), the new owner will have a mortgage of almost $3,100 a month (includes $120 HOA dues).  That’s after a 20% down payment of $128,000!

I don’t know about you, but I don’t know that many people who have that much cash lying around right now.  Even if you do have it, why would you want to put it into an illiquid investment like a house?  Let’s say you’re smart and you only make the minimum down payment of 3%.  Your down payment will only be $19,200, but thanks to PMI your monthly mortgage payment skyrockets to $4,081 A MONTH!  That means that I would have to pay $1,350 more per month for the “privilege” of owning in my neighborhood.  Sure, I’ve ignored the “tax benefits” of home ownership, but those are usually wiped out by the maintenance costs.

As I have said before, there’s a reason that home ownership is at a 50 year low.  They cost too much!  I know that the figures I’ve shared are much higher than the median home price and income, but the principles can be applied to your own financial situation.  Do not succumb to the temptation to purchase a house at these prices, even if someone tries to lure you with a cool “Rocket Mortgage” app!