Bad Financial Management and The Mortgage Meltdown
THE DETAILS: Home foreclosures, and the rate of homes entering the foreclosure process, rose to a record in 2007 as homeowners battled slumping house prices and spiking loan payments.
THE DEBATE: Who is to blame? The borrowers - for their questionable financial management and for taking out loans they did not understand and could not afford? Or the lenders - for offering loans that they sold as being less expensive than they really were?
COMMENTARY: The subprime lending debacle has its roots in a combination of factors. Aggressive real estate agents, lenders, home developers, banks and financial institutions got involved in the mortgage lending, management and investing process. The Fed has been criticized at both ends of the issue — for doing too little and too much: for not doing enough to prevent the crisis from happening, as well as artificially assisting homeowners in trouble by providing bail-outs and protections after the fact.
In my opinion, what we should have is a free market in which you’re held responsible for your own decisions. If those decisions are wise, you’ll profit; if they’re reckless, you’ll have only yourself to blame.
We’re Not Tracking Finances, Spending and Borrowing Well Enough
Borrowers willingly took on these mortgages. They are the ones with the most intimate knowledge of their own financial situation, risks, job stability and future prospects. They are the ones who are responsible for their own financial tracking. That’s information no credit score or income statement will ever reveal. As such, it is their responsibility to read and understand the terms of their loan, and determine their loan cost now and into the future. People who make poor financial decisions or speculate carelessly will lose money — and that’s the harsh reality and efficiency of a free market.
To bail-out such borrowers (as the “Anti-Predatory Lending Act of 2007″ does) sends a horrible message to everyone else: that if you borrow to own or speculate in housing that you cannot reasonably expect to afford, and if the market turns against you, then you can count on a government hand-out or a legislated low-rate to soften your fall.
Imagine that we applied the same logic to credit cards. Lenders “ought to know better” than to approve a new card with a $20,000 limit, if the borrower already has significant credit card debt. Is it the fault of the card company, or is it the fault of the consumer who cannot control their spending, who hasn’t spent enough time tracking finances, and has requested yet another card to fuel their shopping sprees?
The Real Culprit of the Subprime Mortgage Crisis?
Surprisingly, few in the media are calling out the original culprit here: a government policy of monetary manipulation that pushed interest rates to artificial lows. This, along with “pro-housing” legislation and tax-breaks, sent a signal to some that housing was a can’t-miss proposition. But when interest rates are decided by the whims of bureaucrats, the party can end at any time…and unfortunately, it looks like it has.
Further Reading:
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That’s pretty interesting. I stumbled across something related to the subprime crisis today I thought you may find interesting. Apparently, Fannie Mae is removing it’s portfolio cap, the thing that limits its (and in turn the government’s) liability/exposure to mortgages, which is also the highest it’s ever been in history right now…they’re removing it completely in March. No more cap. Doesn’t sound safe to me. Any thoughts?
Not everything can be chalked up to this nice little black or white picture. There is a lot of gray in there. Ask anyone who has gone through this situation and they will tell you that too I’m sure. I think some people take on more debt for a house because they have been sold on the American dream, or because they are trying to do better for their family. When the housing market folds, and lenders are slack (or worse), and jobs are sent overseas.. well didn’t someone say people are bitter? And with good reason. Everyone is trying to get ahead and some are paying the price unfortunately
Some other thoughts: You have a fairly poor El-High school system that is chronically underfunded and has historically lacked national standards. Then, you have complex lending vehicles. Foist complex lending vehicles on a public without the background to understand them, strong incentives to own a house, strong incentives for mortgage brokers to sell more mortgages, and little government guidance or assistance, (oh and really bad foreign policy driving oil prices higher), and you get a mortgage meltdown.
No one should have been selling a mortgage based on the idea that housing prices always go up or that interest rates always go down. Everyone should have a BS detector that would enable them to see through “housing prices always go up”.
The lenders are at fault. The borrowers are at fault. The Administration is at fault. Congress is at fault. Ben Bernanke and Alan Greenspan are at fault. Oh, and all those people hawking no start up capital million dollar schemes on Sunday infomercials are at fault. It’s a big mess. There’s a lot of blame to go around.
The sad truth of it is, a lot of the people who are getting the short end (and liable to get the long end of a bailout) would have been a lot better renting, even with the tax incentives.
ah yes, the search for bad actors…
-the famous “combination of factors” and don’t forget
-feckless borrowers who fail to read loan contracts
-pro-housing legislation and tax breaks
-bailout legislators & government handouts
-whim oriented bureaucrats who set interest rates & steal the punch bowl
-mis-applied “free market” values & irresponsible borrowers
no greedy loan officers in your list?
no financial engineers repackaging loans with AAA labels?
no Phil Gramms or other rapacious Texans?
You aim like a ghostly Ronnie Regan just now finger pointing the government as problem one more time
As ML Harris states there is enough blame to go around. And while many are to share in the blame, is it a national crises? As I mentioned in my blog (http://prosperingyou.wordpress.com/wp-admin/post.php?action=edit&post=5″ on 3/13/08, most areas in the US that have the highest foreclosure rate have had growth in the last five years of greater that 100%. We need to realize that everything has a cycle, even housing.
As a salesperson at various mortgage brokerages over a three year span, I witnessed incompetence, greed, and a lack of oversight at virtually every level of the loan process.
During a booming housing market offering easy money for any yahoo who could pass a relatively easy DRE exam and read a script, millions of new employees joined banks, mortgage brokerages, real estate agencies, title companies, and appraisal offices with very little experience. Add into that mix obscenely loose lending guidelines that allowed a person with a 580 credit score to purchase a home without verifying their income or putting any money down, and you’ve got a time bomb waiting to explode.
There was plenty of fraud and deceipt, but it was at every level. Mortgage brokers in some cases were making fraudulent W2’s and paystubs, but more commonly there were guilty of knowingly placing borrowers in programs that they would never be able to afford. Borrowers were tapping into every dollar of available credit with no intention of ever paying any of it off. Appraisers were pushing home values. Real Estate agents were actively trying to upsell clients on more expensive homes and facilitating illegal transactions where buyers would put no money down and recieve cash back on closings by paying over-inflated prices. Title company reps would forge and alter documents to ensure that closings would occur quickly and smoothly.
Ultimately it was a system with no policing that failed itself. i don’t know that any one cog in the machine can be assigned the blame. Hopefully the market will correct itself by putting safeguards against such “irrational exuberance” in the future.
One of the interesting disconnects in the real estate and home finance business is that people are very willing to go online to do research about a new home or loan, but when it comes time to transact they choose to do it with a human hand-holder.
http://www.mysunsetmortgage.com
Has it occurred to anyone that a good number of loans were made to people who COULD afford fixed rates but chose to pay 1% or less for a couple of years? True, the reset rate hit many of these but guess what - a whole lot more avoided it. Our mortgage broker - while seriously not perfect in retrospect - had been in the business for 30+ years and was open that it was a great deal but had a dangerous side - so to only use it for a year or two and the instant rates started raising to refinance. We could afford that (although…OUCH!) and did so.
What kills me about the whole blame the borrower discussion is that it is implied that our crazy impulse to do desperately needed home repairs is somehow responsible for the crisis. Our wasteful funding of a son’s surgery copayment and partial college tuition is somehow related to the TRILLION dollars lost. No one wants to talk about the defunding of basic services, healthcare, supports for education that suddenly put all these costs on the backs of middle class within only a few years. I wish they would publish the list of who made how much money out of this and what THEY spent it on - then compare THAT to the infamous subprime borrowers. The only problem is that we’d have a revolution instead of an election.