Yes, as it has been charged by many, various arms of the government did push mortgage lenders toward providing more people the opportunity to seek homeownership. However, many characterize it as "strong-arming" which is, in my opinion, misleading. It's difficult to envision the American banking system being "strong-armed" by anyone, even the Feds.
Mortgage lenders resisted until they discovered that they could make huge profits from such lending. It is the lenders who threw out all of the long standing protocols for processing and approving mortgage loans. It is they who dropped the ball in performing proper diligence in verifying borrower employment, income, credit standing, etc. It is the lenders who largely discarded appraisals, opting instead for "desk top" valuations and the use of AVMs or Automated Valuation Models which are often wildly inaccurate.
As to blaming the borrowers, while it's true that a few understood what was going on and took advantage of the situation to sate their greed, that is NOT true of most of the people who got caught up in this mess.
Most were and are young, expecting or at least hoping to be "upwardly mobile" and wanting to purchase a home - the supposed great American dream.
Scenario:
Hubby and Wifey test the waters only to find that their bank and/or some of the more traditional lenders to which they apply, deny them their quest. Something about a weak credit score. However, someone advises them to seek out a mortgage broker (the bane of our existence,) who can shop around for a lender who will, perhaps, approve their application.
The mortgage broker, Bobby Slick of 'We Saw Ya Comin Mortgage Services,' smiles broadly and invites them to have a seat. He takes their application, sometimes suggesting ways in which to "tweak" some numbers here and there. This may make the potential mortgagors a bit nervous, but Bobby just laughs it off, reassuring them that to do so presents no problem. He does it all the time. Keep in mind that nothing is said to these people about anything called "sub-prime" mortgages.
Bobby puts all of this "data" together, sends it off into cyberspace and then waits like a bluehaired grandmother playing nickel slots at a riverboat casino, until some lender bites. It's a rare occurance if not even one takes the bait. There are usually 3 or 4.
Article comments
— go to most recent comments1 - Dave Nalle
It's a fun story, B-Tone, but I question the basic premise. Who has actually been blaming the borrowers? From what I've seen there's been plenty of blame on the lenders and perhaps not enough blame directed at government regulators and legislators, but even the most callous agree that the borrowers are victims, even if mostly of their own ignorance. I think you're tilting at windmills here.
I also think you're a bit off on some aspects of the scenario. First off, the problem isn't so much with people overextended into 3000 sq ft homes. It's with people who probably couldn't afford any house at all who end up in a poorly made 1500 sq ft entry level rat trap with very limited resale value before the market went south.
You're also soft-pedaling the extent and rottenness of the mortgages people were given. You left out the balloon payments, the financed downpayment scams (effectively double mortgages), the cash-out refinances, the 50-year term notes, etc. And in doing it you miss the fact that their payments likely didn't go up much on their ARMs because interest rates stayed pretty low through the whole thing.
You're also missing how fast it all happened. It wasn't a 7 year period. We're talking about people going belly-up in 2 or 3 years in many cases.
Anyway, you want to know what I really blame? A twisted version of the American Dream which politicians and the media, especially on the political left, have been selling completely irresponsibly. This idea that everyone should own a house is just ridiculous. Renting is just more sensible for a lot of people. Maybe down the road they can work their way up to buying a house, but there's nothing shameful about waiting and working to get what you want.
This idea of getting everything instantly is the real culprit. Whoever promoted it and took advantage of it and sold it to foolish people is at fault, and it's a culture wide phenomenon. Maybe it starts in the school system. You aren't supposed to own a house when you're 25 and just getting a family started, no matter what terms you get. You rent, you save money, you get the kids started in school. Then maybe hubby and wifey both get jobs to cover the mortgage on their first modest cottage.
This ought to be obvious. I'm pretty sure it WAS obvious when I was growing up. So who tried to change it against all common sense?
Dave
2 - Cannonshop
When I was a kid in the eighties, there were people in my town who were living in places that the bank wouldn't foreclose on, because it couldn't get from an auction of the property the amount that was owed on the note.
ESPECIALLY after they closed the Chimney-Rock coal mine, and hte bottom dropped out of the tourism business with the drop in oil-prices.
As my folks were in Real-Estate at the time, it left an impression-so, while my peers were busy getting sub-prime loans and buying wedding-cake houses, I've been renting, and saving. I'm still about five years from a down-payment assuming prices don't go through another cycle of going up at the rate they climbed between '98 and '06, and assuming I don't get laid off.
I intend my first "House" to be a mobile-home on Land-the reason is that I don't feel a deep decisive need to be enslaved as a tenant to the Bank for the rest of my life. this is probably also a factor in why I don't carry credit-cards, or buy things on payments.
3 - Doug Hunter
"I intend my first 'House' to be a mobile-home on Land"
That's not such a bad idea if you buy a foreclosed trailer. There was a nice 2002 doublewide on an acre up my way that I paid $18K cash for as a foreclosure in January. That's alot of space and a great value for the price. At the height of the real estate bubble and the get rich quick real estate flipping foreclosures were actually overpriced compared to well kept homes, now the bottom has fallen out and it's a good time to buy (at least in my area).
4 - Baritone
Dave,
While I don’t work specifically in the mortgage industry, keep in mind I have been in the residential real estate business in some capacity for the better part of 30 years.
I could drive you around Indy trough the myriad of “Vinyl Village” subdivisions having just the type of homes I described above with half or more of them sitting empty. The scenario may be a bit different in other parts of the country, but I pretty much nailed it for much of the Midwest.
Of course, there are any number on permutations on the various lending schemes that found their way into the market around the country. Many of the oddball things you cite above surfaced in areas where people were financing multi-million dollar houses or condos in Florida, along the east coast, perhaps areas in Colorado, and of course California, among others. These are the prime areas where the bubble grew quickly and exponentially, then abruptly burst.
In Indiana and most areas of the Midwest in particular, the “bubble” did not grow as quickly nor as large as in some markets. At its height builders and developers were advertising on the tube, in newspapers, local mags and even on highway billboards those 3000 square foot slab homes for as little as $119000. Yes, they were and are poorly built " a tornado would take one out in a heartbeat.
And, again, here in the Midwest the timing for many has been as long as 6 or 7 years. Many of the ARM type loans made here kept their initial low interest rates for as long as 3 years and then rose incrementally every 1 or 2 years hence.
As to who is blaming the homeowners? For starters there’s been plenty of that right here at BC. Many of those opposed to “bailing out” the hapless mortgagors more often than not complain that those suffering the loss of their homes got just what they deserved. In some cases, maybe so. For the most part though, I find that notion to be misdirected and not just a little harsh.
“This idea of getting everything instantly is the real culprit.”
I pretty much agree with you there. My dad uttered the same sentiment over 30 years ago.
It does emanate largely from the Madison Avenue mindset I allude to in the article. We are constantly cajoled to buy and use stuff we don’t really need. Advertisers endeavor to convince us that we MUST HAVE things that in many instances we didn’t even know existed prior to the ad campaigns.
I believe that the so called “American Dream” is baloney myself. But the American public has been sold that particular bill of goods for years. It has become rather a self-realizing prophecy.
My wife and I bought our first home in 1978, six years after we were married. We were expecting our first child. Up to that point we had lived in an assortment of rental homes, first in Bloomington, then in Indy. Under the circumstances we felt compelled to get into our own home. Upon reflection, it was hardly a necessity. Our first son and his brother, who came along a couple years later, would have no doubt survived quite nicely living in a rental. As it happened, I was laid off only a couple of months after our taking possession of that home. I struggled for several months before finally landing another job. We came precariously close to losing that house.
My wife has a niece who, along with her husband married, got pregnant and bought a home all within 2 years. Shortly after, they added twins to their brood. They are both teachers, but she can no longer work full time owing to the appearance of their nearly instant family and some health problems stemming from her last pregnancy.
The home is quite similar to what I described above " a bit smaller at around 2600 square feet, but otherwise, dead on. Happily, they managed to refinance their original ARM loan to a fixed rate mortgage just prior to the bottom dropping out here. However, they have no equity " the home is now probably worth as much as 30% less than what they paid for it. They will have to stay put probably for as much as 8 to 10 years for the home to regain any appreciable equity.
BTW " My mother and father were married in 1925. They didn’t purchase their first home until 1942. Apparently, even then my maternal grandfather complained that they were needlessly rushing into it. Times change.
B
5 - Dave Nalle
I believe that the so called "American Dream" is baloney myself. But the American public has been sold that particular bill of goods for years. It has become rather a self-realizing prophecy.
I like the American Dream, but I don't like what it has been turned into. If you go back and read Horatio Alger who was the grat promoter of the idea in the 19th century, his scenarios usually involved a great deal of hard work and a certain amount of cleverness before the hero achieved success. Now people seem to think you can get the dream by being remarkably stupid. Which brings me back to blaming the schools and the policies which have made them promulgators of bad economic theory and poor work habits.
Dave
6 - Roger Nowosielski
How can anyone object to the notion of "the American Dream" is beyond me It may have died, as many novelists since F. Scott Fitzgerald, John Steinbeck, Upton Sinclair, Theodore Dreiser, have argued and continued to be exercised by the idea and it's presumed death. But it was, once upon a time, the essence of what America was about, America as an idea - the great promise.
"Baloney?" Maybe 'tis so today, but it certainly wasn't so fifty or hundred years ago.
Why did they all want to come to America and start a new life. And many still do.
7 - Baritone
The particular "American Dream" I'm alluding to and the topic of this article is homeownership. One can certainly attain great success and live a full and good life here and elsewhere without ever owning a piece of the rock.
The unwavering quest that so many people join to get that first - then second - then third home is part and parcel to the drive toward material wealth and "keeping up with the Jones." There is nothing inherently wrong with material wealth, but it all too often becomes the be all and end all for American families.
The whole idea of "ownership" is somewhat of a misnomer in any case - especially when it comes to real estate. What anyone "owns" with respect to real property is a "bundle of rights." Those rights come with limitations and responsibilities.
All too often the capping achievement of people is the acquisition of some version of a "McMansion" that are now found in and around most communities in this country - some edging toward or even beyond 20000 square feet of living space. I have personally appraised homes as large as 15000 square feet - in this particular case for a family of 4 - mom, dad, sis & bro. Who the fuck NEEDS 15000 or 20000 square feet of house to bounce around in? It's ludicrous.
I grew up in an approximately 1000 square foot 2 bedroom bungalow never feeling the need for more.
I now live in an approximately 1500 square foot ranch having a full, finished basement giving us in effect around 3000 square feet. There is just the 2 of us now as our kids have moved on. This is much more house than we need. Unfortunately, owing to the lousy market, we can't afford to sell at this juncture. We'd lose our butts.
B
8 - Dave Nalle
Roger, it's not the dream I have problem with, it's the currently popular idea that the dream can be achieved instantly and with minimal hard work.
Dave
9 - Roger Nowosielski
Of course, B-tone. The ownership of the second and third home and keeping up with the Jones are not worthy of discussion. The first option is available only to the rich, the second may have been operative in the sixties, when it was still possible to live fairly comfortably on one salary. And the influx of women into the labor market was, initially at least, grounded in the desire to supplement the main income and perhaps experience some of the luxuries. But that was still a sign of relative prosperity. Don't forget, too, a contrary trend which aimed as decreasing the work week - because of the advances of what they then called (office or factory) "automation" - for the sake of greater leisure time. So we're not really disagreeing.
But home ownership always represented the greatest lifetime investment for the average American - and it was quite a real thing in the good old days and times. (Which is not a comment on the present situation.)
Roger
10 - Roger Nowosielski
Dave,
I don't believe I said anything to the contrary. "Money doesn't grow on trees." That's the misconception (or was at least) on the part of many immigrants who come here. Hard work is a tacit assumption concerning which we do not disagree.
Roger
11 - Frank Curmudgeon
If you're looking for somebody willing to put some of the blame for The Great Mess at the feet of those who bought more house than they needed, I am happy to volunteer. There's plenty of blame to go around and plenty of bad actors, but I am not about to let these folks off the hook, and I am certainly not about to call them victims. Don't get me started on the idea that the taxpayer should bail them out.
I am also very uncomfortable with the idea that they cannot be expected to think for themselves and/or held responsible. That's condescension of the worst kind.
On the other hand, I would certianly agree that these borrowers (and just about everybody else) got bad advice. Hubby and Wifey didn't borrow using an ARM because they expected to be rich in five years, nor did the foolish lender give them the loan on that theory. Nobody worried about the ARM because everybody just knew that the house would go up in value in the meantime, so worst case they could just sell and pay off the loan.
12 - Baritone
Well, in my scenario and, I suspect in real life its not an expectation of becoming rich in a few years. The expectation was rather that the borrower's income would likely increase in the coming years enabling them to handle any increase in their mortgage payment. For many, it simply didn't work out that way. And, yes, it has and oddly still remains an expectation of many that their homes will earn equity as time goes by. While tradition supports that notion, in most cases, that is no longer the case.
Under normal economic conditions people who suffer foreclosure neither expect nor receive any special dispensation from the government or anyone outside of maybe family. Frankly, the concern now is not so much for the individual, but rather the numbers of those foreclosed upon has grown to such a degree that whole neighborhoods, even entire communities face economic ruin. As painful or even unfair as it may seem to many, the failure to provide some type of stop gap intervention could have far reaching and long lasting negative repurcussions. It is IMO better to pay the piper now, save at least some existing loans keeping people in their homes rather than setting them out into the street.
As a nation, we are not much on forgiveness. Our puritanical roots tend to provide little incentive toward charity. We are very much a "tote your own load" society. A lot of that sanctimony comes crashing down on people when they suddenly find themselves on the short end of the stick. A few retain some amount of stoicism refusing any help regardless of how desparate their situation might become. Unfortunately, such stubborness often causes pain and suffering for others, all in the cause pride.
But, I digress.
B
13 - Zedd
Baritone,
Beautifully stated. That is exactly what took place.
I took a residential tour with a national representative of Habitat for Humanity about 6yrs ago. This took place during the intermission of a luncheon where Henry Cisneros spoke about home ownership and empowerment.... The Habitat rep expressed just how President Carter was frustrated about the predatory lending practices that were taking place. He said that Carter predicted that when this bubble bursts, we will all be in a difficult situation. The "habitat" new home owners were already suffering the consequences of those practices even then. Not being in the lending, or real estate business it was my first time hearing about predatory lending. I googled and became the wiser. I did not get the scope of the problem then....
Later I would work in an organization that does housing counseling. Your scenario is dead on!
14 - Roger Nowosielski
I second that. A very evenhanded, fair-minded statement.
15 - Baritone
While there are likely a number of varying such scenarios, some of which would properly put a larger portion of the blame on the borrowers, I believe that for the most part, the homeowners are more dupes than schemers.
B
16 - bliffle
"Sub-Prime Lending: Are the Borrowers the Bad Guys?"
IMO this is scapegoating and cowardice. The lenders screwed up: they should admit their mistakes and vow to reform. But they won't.
17 - Baritone
They won't unless they are forced to do so.
There is a change coming in the manner in which lenders deal with appraisers effective in May. The change will effectively remove the appraiser from direct contact with lenders, or at least those involved in originating or processing loans.
The article I wrote here about how the appraisal process works and the pressures under which appraisers have traditionally been obliged to work went a long way toward maintaining a climate in which appraisers found themselves between a rock and a hard place.
The people who were putting pressure on appraisers to "come in" with a figure that allows the transaction to succeed have also been the very people upon whom we depend for assignments. If an appraiser fails to "cooperate" future business with that company might well be in jeopardy. Hopefully, that won't be so much of an issue when the new rules take effect in May.
What I find troubling is that lenders apparently are going to continue to utilize so called "drive-by," "desk-top" and "AVM" valuations - none of which involve an actual physical inspection of the property - the last 2 don't even require that I leave the office. It's just stupid.
B
18 - Baritone
I know people stopped reading this some time ago, but I just thought I'd mention for the benefit of anyone who may be lost or whatever that may have caused you to stumble in here, the "60 Minutes" segment about the mortgage crisis. Quite interesting. It pretty much supports my article.
B
19 - Ruvy
Baritone,
I don't download "60 Minutes", but having read your article, I have to say it is substantially on the money, so far as the Midwestern United States goes.
In 1993, I started driving aimlessly around our neighborhood looking for a house to buy - me the apartment dweller from Brooklyn who was always telling his bride how happy he was with an apartment. I would drag the toddlers with me after picking them up from daycare, and look at houses with them, letting them run around, to get the feel of having their own yard. After I picked my wife up from work, I would drag her around too, assuaging her annoyance by taking her to Bakers Square or someplace like that so she wouldn't have to cook.
P.S. we bought a stone house for $62.5K. We did not get a sub-prime mortgage, we got a regular mortgage - at the lowest rates the nation had seen since the 1960's. The plan was that we would stay there and retire in St. Paul. We had no plans to buy another house. I was already 42 years old. But Destiny had other plans for us and we sold this house for $135K, doubling our money in 2001.
We were never in the position of the couple described in this article. But my brother and sister-in-law, both naifs, could easily have been. The event that saved them was the fact that my brother-in-law could not handle money at all, and got evicted from his apartment by his landlord - and had to live with his nasty brother-in-law, Ruvy, for two years.
After two years of forced savings and hectoring lectures (no, I'm not a nice guy), he was too scared to buy anything - and he still rents a small flat in a suburb of St. Paul. He has been spared hell.
20 - Baritone
Ruvy,
Nice to chat. I doubt that "sub-prime" loans were available when you went home hunting. You are probably right that your brother in-law dodged a bullet.
We bought our present home (our 3rd) about 15 years ago with an adjustable rate or ARMs mortgage. It wasn't "sub-prime" but the ARMs were relatively new to the market and seemed like a good idea at the time. After about 6 or 7 years, though, we saw that it could get rather bad. The interest rate had risen incrementally over those years. There was a cap on it, though, at around 9%.
So, 8 or 9 years ago we refinanced into a 15 year fixed rate mortgage. We pay around 5.75% apr which perhaps isn't great, but not bad. When we bought our previous home our mortgage had a fixed rate of 11%. Actually, we were glad to get that as the rate had been 12% when we first applied.
There was a time when I seriously doubted that we would ever see rates as low as 8%. Things change.
How is purchasing/financing a home handled in Israel? Is it somewhat the same, or something different than here in your favorite country?
B
21 - Ruvy
Baritone,
In Israel, there is no FANNIE MAE or FREDDY MAC, and there is no "national homwowners'" policy reducing income taxes as is done in the United States. In fact, there are far fewer reasons to get your income taxes reduced here (and since they are so damned high, everyone tries their best to dodge them).
Anyway, the fact that there are no "mortgage sponges" here has spared us a mortgage crisis - but these facts also affect the way homes are bought.
When you buy a house, you also have to take out a term life insurance policy for the amount of the mortgage with the mortgagee (did I get that right? It's been thirty years since I took real estate law) as the beneficiary. When you are 58 years old, that can add a lot to the mortgage payment. But on the other hand, the insurance policy is the real "death wage" - if I keel over, G-d forbid, and get buried in the Shiló Cemetery, the bank is paid off and my widow owns the house free and clear. Along with sitting shiv'á, she can throw a mortgage burning party (well, she can't, but her neighbors can).
You have to generally put down more up front, and there are some hefty taxes that go along with the purchase. For "new immigrants" like me, a lot of the taxes get waived. Finally, in this country, most payments are handled by what are called "standing bank orders" that allow the creditor to reach into your bank account and take your money directly. So, since folks get paid on the tenth of the month, and the mortgages (or rents) are usually due on the first, everyone is shuffling around to make sure there is not too much month for the money.
But other issues intrude to make this seemingly simple description a nightmare. First, there is the National Land Registry - known as tábu - which has to be satisfied. If you live in Judea and Samaria, there is the also the Civil Administration (the civilian branch of the Military Government) that has to be satisfied. Then there are the problems that come with owning apartments in buildings (the vast majority of "homeowners" own apartments), and the problems that are involved in heating the apartments (usually this is a building wide problem, as well as managing the common areas of the buildings. In Israel, there are few management companies - usually there is a building council - a v'ád báyit that attempts to tend to these affairs.
I could bore you with more details that make the average Israeli's life a pressure cooker - but I'm feeling merciful, and I'll spare you. Let's just say that a lot of Tenormin gets sold here.
22 - Baritone
Ruvy,
You did use the term "mortgagee" correctly.
Most people believe that when they obtain a mortgage that they are the mortgagee. (That's even used in a song lyric in the show "Funny Girl" - "meet a mortagee.") However, the lender is "giving" the borrower money - the lender and lendee, if you will, whereas the borrower is giving back the promise to pay which is the mortgage. Therefore, the borrower is the mortgagOR - the one providing the mortgage paper, and the lender is the recipient or the mortgagEE.
You have passed that question on the Real Estate Lending 101 final exam. Very good.
Your description of the requirements for home borrowing and ownership there does make it seem to be a rat's nest. As you know, it can get complex here as well, but Israel may have the edge on the US in that regard.
While, as you know, I am not religious, I sometimes find myself muttering a sort of "prayer" to the Paperwork Reduction Gods. So far, to no avail.
B
23 - Ruvy
Well, Baritone, I feel honored having "passed that question on the Real Estate Lending 101 final exam". Do I get a certificate?
Paperwork reduction?
Heh! Every person of consequence owns a stamp (bul from the Latin bullus) that he uses with his signature. "Person of consequence" can be defined as broadly as "the night commander for a volunteer police unit". Even green immigrants like me have been told I need such a stamp with my signature! My doctor prints up prescription forms and signs and stamps every damned one of them. Without the bul, they will not be accepted.
I've been in the unfortunate position of taking out bank loans here. You would not believe how many times I have to sign and initial the damned documents! I'm waiting for them to demand me to sign in blood next time!
Israel is, as was the Soviet Union, a "document conscious country". Everything has to be documented and counted, weighed and measured. The damned crowns that Burger King gives out to kids for its kids' meals are counted individually every night! In St. Paul, we counted the damned crowns by the sleeve - and then only once a month for monthly inventory. A Russian immigrant friend of mine keeps telling me, "visit Russia - before it visits you!" I'm inclined to believe him. govorym po Russki We speak Russian here!
I sometimes find myself muttering a sort of "prayer" to the Paperwork Reduction Gods. So far, to no avail.
Your "prayers" to the Paperwork Reduction gods need to be redoubled, Baritone. You need to do what the priests of Baal used to do in ancient Israel - cut yourself and cry out loud in a voice that reaches the heavens (if you cut yourself in the right place, that is exactly what you are likely to do). Maybe the Paperwork Reduction gods are conversing amongst themselves - or are defecating. Most likely, they are flooded in Paperwork!
Anyway, my wife is attempting to get me away from the computer to eat dinner. I shouldn't ignore her. There are techniques to remaining happily married, you know....
24 - Baritone
Hey, I'm well on my way to 37 years of marital bliss. One does need to learn the language of marriage (which is far different from the language of love,) as it were, for it to have even a chance of survival.
I can say, however, I do love my wife and hold her in awe. We have suffered mightily during the past 5 months or so. My business was virtually non-existent for much of that time. She has, thus far managed to keep us and our sons with at least our heads above water through it all.
She points out to me that it has involved some, uh - deficit spending, like making two mortgage payments with a credit card, essentially robbing Peter to pay Paul, but ya gotta do what ya gotta do.
Business has picked up over the last couple of weeks. If it continues, we will hopefully be able to get things back into some semblence of order. But, of course, the one we'll be "paying" for some time is the Piper. Perhaps I could go before Congress and plead my case for a federal bail out. If my business should fail, I hate to think of the ripple effect it would have, say from here in my basement all the way out to the end of the driveway at least. :~/.
B
25 - Roger Nowosielski
B-tone,
You're so right there - about the language, that is - but my experience had come through three or more marriages and long-time relationships. And the odd part is - each one was better than the previous one.
Roger