Don't Blame Homeowners for Today's Housing Crisis...

As a lender, I am sick and tired of being beat up on by Washington, the media, and home owners currently in trouble.

If you did tradition financing, bought a home with less than a 38% back debt ratio, you bought correctly. If you are in trouble now...  I'am sorry to hear about it, and I have plenty of compassion for your situation.

But, untold number of people sat in my office begging me to give them loans they clearly knew they shouldn't be getting.  Debt ratios as high as 60%, interest only adjustable loans, no doc loans to hide their real ability, investment property with no experience, and more. If they are in trouble now... I have ZERO compassion.

Sure, the lending industry offered products that they probably should have... but I don't remember holding a gun to someones head for months on end while having them chained to my office desk to make them sign on the dotted line.

Like a previous post said, our parent wouldnt have done it...  It was clearly a consumer driven problem. A me me me, now now now, don't worry, pay later attitude that got many people in trouble.

It is interesting to see the consumer attitude today seems to have changed back to a more traditional attitude. Consumers applying with me today arer very aware of ratios, and REALISTIC affordabilty.

everything was fine until the wall street crew learned that  they could get 200-300 additional basis points of yield from mortgages they packaged up  as securities (it helps to know that wall streeters pitch a tent in their drawers over 10-20 basis points...200 was irresistible).  it was the boxcars of wall street cash being run by second tier B school MBA's that was the end of underwriting and the beginning of the free for all that had wage earners taking loans that EVP's would not qualify for.  in an effort to keep up many previously legitimate mortgage companies had to play  the same game.   even the criminals at Countrywide were constrained prior to the development of the 'financial instruments' that were created and peddled as investment grade securities.   the demise of underwriting was the rise of the liars loan.

that said, if we don't point fingers there will be no reckoning and the guilty will skate.  as irresponsible as the lenders were...many borrowers were well aware that  they were LYING on their loan apps...LYING IS NOT OKAY!  no one is saying they were not encouraged and coached, but they are certainly not blameless.  i know loan officers that simply would not engage in  that sort of business and their incomes suffered for their integrity.  i also know some who were so crooked they slept like doped mice in a college lab as they buried their clients in loans they couldn't afford by any stretch.  I know buyers with advanced degrees in business and accounting that knew exactly what  the risks were of buying at an elevated price, with an option arm loan, in   the era of the lowest (at that time) rates in decades.  i had one guy tell me i should take a cue from him if i wanted to make any real money.  he now rents a house from one of his old neighbors...

plenty of blame to go around.  and failure to assign it will be the moral equivalent of endorsing bailouts for the guilty, all  the guilty, at my expense.   plenty of borrowers who wanted something for nothing.  it doesn't take a rocket scientist to know a foreman for a landscaping company cannot really afford a $620,000 house as a first time buyer.  this is a scenario that i saw variations of many times.   the buyer is every bit as guilty as the realtor and the lender who were all in  the deal together.

We are an interesting society, and that includes the everyday "Joe" as well as the big banks. We are all afraid to miss out on what is perceived to be a good thing. The run up to the dot.com bust in the late 90's and early 2000's saw lots of people ready to lend and borrow money so they could get a piece of it - regardless of how senseless the business model was. Part of the real estate boom happened because people were tired of taking a beating in the stock market back then so they invested in real estate instead. The run-up to 2005 was the same phenomena - banks didn't want to miss out on a "good thing" and consumers didn't either. They figured if smart people like Greenspan, Clinton, Bush, and the banks all said we should strive to be homeowners and the sky was the limit, it must be OK. If you haven't listened "The Giant Pool of Money" you should. Maybe the best explanation of how we got here.  http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money

With all that said there are many innocent people didn't jump on the band wagon, but can be counted as "collateral damage." 

Margaret,  Great post I agree with some of it.  However, being a professional futures trader, past developer, and now a home inspector I've learned about trends.  

As Michael Douglas stated in the movie "Greed is good".  That is exactly what happen in 2000 ~ 2008.  I point to the following article in Money Magizine June 2005 " NEW YORK (Money Magizine) -Home prices across the country will likely keep rising over the next year.  While many hot markets on both coasts could see a dramatic slowdown in their growth rates, the forecasters at housing research firm Case Shiller Weiss aren't predicting losers anywhere."

Complete article here @ money.cnn.com/2005/05/12/real_estate/re2005_100markets_0506/  very interesting read and shows you exactly how we got into this mess...greed.  Anyone remember banks in CA were looking at doing zero down?  I do.  Again driven by greed and everyone in Washington had a hand in it, some more than others.  Worse some are still in office.

Today the stock market sold off.  Markets go through trends we have ups and downs.  Everything is driven by price if you know Fibonacci a good retracement is 38~61% of price.  This is what happen to the stock market in 2008.  The doom and gloomers kept feeding bad news and that lead to people selling their 401ks at the bottom only to see the market correct and retest highs again.

The new trend is rental income property.  People who lost their homes need a place to live.  Most investment inspections I conduct when I ask about a lender I hear they are not using a bank...paying cash.

Bottom line is this do your own research look at markets in your area and see if prices are starting to rebound.  Here in the North East prices are stable.  If your looking to invest find a mentor fastest way to make money is learning from someone that has done it, and will teach you how they did it.

Every professional stock trader knows "buy low, sell high."  The key is not holding and knowing how to take profits.  When you see rents dropping because people are buying homes...sell your rental property...get out, take profits.  Find a new market, watch help wanted ads.  Where are the jobs going?

If your looking for a personal home, look long term investment that you can AFFORD.  If you never owned a home ask a friend who owns what the cost of ownership is, heat, water, electricity, taxes, and most important maintenance.

Main key to this market is education, do the work and you reap the rewards.  Just like Gold the market swings up and down.  Housing in areas is showing signs of a bottom.

While greed was probably a factor part of the time I think buyers and sellers need to realize that when they purchase or sell a home they are paying market price for the place in time in which they are buying or selling. Market values will always change up or down.  If you paid $700k in 2005 and today it is only worth $500k then you have to suffer the loss or wait for some recovery and growth to  recoup your investment, realize a profit.  If you had paid $500k for that $700k home in the year 2005 you would have been dancing a happy jig then and now!  The reality is what it is worth at the time you are buying or the time you are selling.  And what you "need" as a selling price has not one thing to do with what the home is worth. 

In real estate purchases you really have to think worst case scenario.  If I lose my job or become ill and can't work how will I pay my mortgage?  If married couples are speculating that they will both be earning incomes what if the unexpected happens and you find yourselves "expecting".  Or even worse, what if one of you dies. 

Many factors contributed toward creating the mess we are in today.  Too many buyers over extended with the belief that prices would continue to climb forever, that the high interest, no down loan could be refinanced in a couple of years, that they could sell and make a profit.  Too many lenders were eager to jump onto the profit train with high fees a sure thing.  Buyers didn't care as long as they could be wrapped into the loan!  I can't tell you how many times I counseled buyers and asked them if they really wanted that 80/20 loan and they always said "oh yes! We can do this for a couple of years".  Lenders were responsible for this part of the problem offering easy money for the purchase and then adding a line of credit for the future equity that was a "sure thing".  Borrowers ended up with a debt of upto 120% of their home value! and that was before the bubble burst.  And now they own a home they can't sell, a new car or boat worth half of the purchase price and a drawer full of photo memories of the vacation to France they could never afford without that line of credit.   

An old adage says it all: "if it seems to good to be true, it probably is".

Thanks for the great post and comments, espcially Carla's and Jamie's. Lenders didn't put a gun to the head of homebuyers, but they certainly didn't follow "prudent" lending practices because it was easy money for them and they had no "skin in the game" there was no incentive to act responsibly.

There are a lot of things wrong in our economy and not all of them are the fault of the home owners.  Some took very reasonable Short Term Loans or Option ARM Loans.  There are good reasons to take these sorts of loans - FOR SOME PEOPLE.  However, they were really abused.  However, it is foolish to blame this primarily on the home owners.

Margaret;

I was always taught that homeownership is a long term investment.  Markets go up and markets go down but over the long term there is almost always a gain. I think some people gambled that things would continue to rise and then they fell (oops).  So now they have to deal with it the best they can, whatever that is.  Some people will be able to ride it out and some won't.  Some people probably should never have bought at all.  All we can hope for is that they learn from their mistakes.  However history has proven that we have short memories, this is not the first time this has happened.

Does it really matter who's fault it is? How do we get through this and to the other side. Let's stay productive. Regardless of who fault it is and why, we -- every single American, every single person in the world really -- is paying for the United States current predicament. Let's find positive action steps to take.

Margaret - It's so easy to use 20/20 hindsight to look at everything.  I agree that blaming the homeowners doesn't make a lot of sense.

Margaret, so much feedback on your post! God, with the length of some of these comments, they could have written their own Post!! (Hint to all!) But I know you just inspired them on a Hot subject!

Post #27, Carla, hit the nail on the head!

I have calls every week from consumers who have lost their homes to foreclosure or short sales and they want back IN as home owners. These people most likely put zero down and lost nothing, so it is not big deal to them if they could only get a lender to lend them 100% again.

Consumers who took out the option arms without getting a full understanding of how they work are to blame. At the same time option arms did not bring the housing market down. Wall Street, rating agencies and Fannie are the biggest culprits, however.

It was our goverment "Home Ownership for All" That is what got us into this mess.

I don't know if I would use the word "greedy" to describe homeowners during the boom, but certainly "irresponsible".  Your comment that they made decisions based on the "conditions at the time" is the problem that led to the collapse.  Everyone was spending money irresponsibly and overleveraging with too much debt because "at the time" they could afford all the minimum payments.  SO DUMB!

In our world today, there is no such thing as job security...there are also medical emergencies or car problems to plan for, etc.  So, even if housing continued it's unsustainable meteoric rise, they were still setting themselves up for failure.  People got so busy keeping up with the Jones's, that they didn't have adequate emergency savings, and as soon as their income dipped a little they were screwed.

During 2005-2006, the U.S. savings rate was 0%, yes ZERO, 75% lived paycheck to paycheck, and the average American spent 115% of their income per year.  Yeah, that's not a house of cards waiting to collapse.  Sure....homebuyers have absolutely no responsibility for their current situation...it's all someone else's fault.