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Subprime Fallout -- Are You to Blame? Nope. I am.

In today's (03/16/2007) Wall Street Journal, Phil Izzo reported that just over half of the economists surveyed by The Wall Street Journal said they "expect the unraveling subprime mortgage market to eventually spill over into broader mortgage market."

What does this mean for the rest of the industry?

Is there an underlying problem that the sub-prime implosion is merely a symptom of?

I think so, and so does Jan Hatzius, the chief U.S. Economist at Goldman Sachs in New York who wrote, "The underlying problem is not the subprime market per se, but the reset of large quantities of adjustable-rate debt."

Many borrowers bought their homes using low initial rate ARMs, (the introductory rate usually expires sooner for subprime mortgages) and those home owners may not be prepared for the burden of a higher payment when the adjustment hits.

Picture this: a couple with a young child get an ARM to buy a 3 bedroom house in the burbs. It is a bit farther of a commute, but an area with lower crime, and better schools, which they want for their little one. 2 years later, junior gets a Christmas gift of a new baby sister. The parents convert the 3rd bedroom from a guest room into a nursery. Mom now is not working, and they have the added expenses of dads longer commute, diapers, infant food, and medical bills. In additionTheir ARM adjusts, and now, without mom's income and the added expenses, they can't make ends meet, and may be in danger of foreclosing.

The problem is not with the lender -- Bank XYZ can foresee neither what cards you will be dealt, nor your future familial status. They can't be held responsible for the fact that the necessities of diapers and formula aren't free.

The problem is not with the loan officer -- he or she likewise does not have insight into what cards will fall in the future. At the time they bought the home, the family could afford it, and the projected adjustment would have been covered, had the income and expense circumstances remained relatively the same.

The problem is not with their Realtor -- he or she sold them the house they said they wanted. He or she may have even suggested some other options, but the choice was theirs.

So where does the finger of blame come to rest? Does there actually have to be any finger pointing?

The only finger pointing that I see ever having any productive result, is when you are pointing your own finger back at yourself.

The Lender has to blame their own policies, and correct their programs so that they don't have this type of problem in the future.
The Loan Officer has to blame his or her own practices, and perhaps develop educational material to better prepare the consumer for unforeseen life events.
The Realtor has to blame his or her own practices as well, and consider ways to better identify the client's long term goals and priorities. Discussing "What If..." scenarios with the client to determine the long-term fit the home represents for them might have helped prevent the problem.
The Consumer likewise has to blame themselves. They could have evaluated the viability of their plan to purchase the home more thoroughly before they started their home search. They could have consulted with a financial advisor to help them set up a workable budget, complete with a cushion for emergencies and unforeseen life events.

So, where do you stand? What could you do differently in your practice to help your clients avoid these sort of scenarios?

Other articles on this topic:

Posted by Rich Schiffer, REALTOR, e-PRO on 03/17/2007 01:51 PM

Comments (23)

subprime, arms, foreclosure, advice to home buyers, mortgage

23 Comments on Subprime Fallout -- Are You to Blame? Nope. I am.

MAR

2007

Rich- It may be time for truth in advertising rules in lending.. It's easy to talk about buyers taking the responsibility but the fact is that these loans are not usually explained very well to borrowers. There will always be unforeseen circumstances.. people marry, have kids, get transferred, lose their jobs and die... however if a potential borrower was shown that in 3 years on Jan 1.. your payment will probably be this.. I think they might opt for a different loan or perhaps a lower priced home. They might have to wait another few years to buy to have a better financial edge..We sold a lot of property when you needed 20% down and interest rates were in double digits. It might not be easy.. but in the long run better lending rules would be to everyones benefit.

Oh, don't get me wrong, Kaye, I do believe there should be laws to protect the consumer. The first line of protection, I believe is to be an educated consumer. Realtors and Loan Officers should serve their clients in that way, and educate them not only on their options, but on the potential obstacles those options may create down the road. I tried to emphasize this in an earlier article, Protecting Consumers Shouldn't Take an Act of Congress. True service includes protecting the consumer, and to me that carries over to looking to their near future, not just the current deal.

I have always tried to show clients what their payments will be now, what they can be in the future if they have an ARM and suggest that they make sure that they are comfortable with the payments. It is hard to tell people what they should or should not do, but at least give them the information to make a good decision. Unfortunately, this is not always what happens. There will be a lot of consumers and lenders hurt before this is over.

Did it occur to any of you that these people are in this position because they had a child when they couldn't afford one? Perhaps realtors should give out rubbers.

daisy, your comment seems to have missed the point. You are pointing a finger of blame at the homeowners, (in a crassly sarcastic way, no less). My point was effective change only ever comes when you point the finger of blame at yourself, and identify and implement ways of preventing similar problems in the future.

As sarcastic as your comment seemed, I doubt you expected a serious response, but I will address your suggestion: For some, what you suggest is not an option. Cultural or religious views may be at play that need to be respected. I would not deign it appropriate to cross that line. I have gone so far as to ask a single client who is buying a home for herself and her boyfriend and his daughter from a previous relationship about her long term confidence in their relationship. I want her to be prepared for the possibility of an unforeseen breakup, and the absence of his income. Even though her income qualifies her for the mortgage, she may have based her expectations on his addidional income to help with other expenses. If that disappears, is she prepared? I recommended that she speak with a financial advisor like Benjamin Medaugh of Ameriprise Financial to get objective advice on financial planning.

MAR

2007

Rich:

I understand what you are saying, but in my experience it is nearly impossible to talk a first time home-buyer out of purchasing a home once they have been pre-approved. You can tell them they are better off waiting until their credit improves, have down payment, get better terms, etc. Most times they do not want to hear it. They want what they want when they want it. Most of the times the lender turns out to be a relative or friend and they have a relationship with the lender not me. I still counsel them, but generally it falls on deaf ears. So I can either sell them a home, or they will go down the road and purchase from someone else. I give them my professional advice and after that the responsibility is theirs.

Sandra

Rich... 2 things here.... I agree with Dan & Sandra.... not that this post wasn't good and that we need to educate clients. But I am really starting to get tired of this topic. You know how many clients that I talk to and TRY to educate based on my knowledge and experience? Have we not learned, that people will do what they want to do anyhow? If you are talking about educating, then why don't we just not finance on houses to begin with. I am serious about that. STOP lending all together.

The statements that I made above are for several reasons. Most of these people know what they are getting. I could be here forever. Once someone cries bloody murder, they all stand up and say that they were taken advantage of. Think about it.... PEOPLE CAN READ.... if it's an arm, read the disclosures... if it's fixed, it's obvious. Besides, part of my argument here is that as some mentioned, the future is unseen... you just don't know. If you are thinking about having another CHILD.. sit down and be realistic.... do a business plan... write down your expenses... etc etc.. People go out and buy new cars.. PEOPLE want what they want, when they want... this is the realty of things....

On a 2nd note.... if we are going to educate these clients now.....we need to show percentages of who has these arms. Because I do mortgages, many of these adjustable's are those from the sub prime mortgages. Most sub prime mortgages are usually an arm, because it's explained to them as a band aide loan. So why keep a 30 yr fixed, when 1% higher, when you can get a lower rate... which would be an arm then.

You say... speak to a financial planner.... in all honesty, many of them are of their opinion's and experiences also.... some could be just as bad as these so-called loan officers also. Sorry... but the average consumer needs to start taking responsibility. They need to read the fine print. I think the lending industry has become the fall guy for immature, not practical, and quick thinking decision making.

Overall.....I agree...we need to educate... but what are you going to have in these first time homebuyer classes? Pay your bills? There is only so much that you can teach. The biggest issue is to come down harder on certain lenders and loan officers. Stricter licensing requirements in this area. These are my opinions...Last.. I take my job seriously and personally... clients need to make a better choice when it comes to picking the professionals also... and just not those that make promises. If it sounds too good to be true, then it usually is...right?

jeff belonger

I knew this would spark a good conversation. Thanks Jeff, Dan, Sandra, Phillip and Kaye (and daisy duke!) for contributing to a very animated discussion. I appreciate your willingness to comment on an issue that has been perhaps talked to death.

Consumers do need to make better decisions. Of that there is no doubt. And Professionals need to give sound advice. No controversy there, either. Predatory lending needs to be stopped. No dispute. Smarter regulations and enforcement may be a step to solving the problem. I was trying to suggest in my opening statements that there is no solitary source of the problem. It is a systemic issue. If each of us does our part to control the aspect of the system we directly impact, then the issue can be resolved, with a lasting effect, not just a band-aid, like banning certain types of loans or lowering LTV ratios might create.

Thanks again for the comments, all. Keep them coming.

MAR

2007

Your post has been included in the week in review.

Rich-Great post. I have said in previous comments that it is not always a"bad loan" that got customers into trouble. Thanks for pointing it out in a blog

Jeff, great response to the "blame someone else, it's not my fault" syndrome. People are always living on "IF-Come", thinking they will be making more in two to five years from now so they'll be able to afford the increase or they'll just refinance into something better when the time comes. If this RE market today has taught anyone anything, I hope it is, "hope for a better future, for a better job, an increase in your income, an inproved personal life, but only make financial decisions on what is in the now, how much do I make now, how secure in my job am I now, how will I provide for my children now. NOW, is the only sure thing that you can make a decision on, Hope or Faith will get you into heaven, but they won't pay the bills.

This is a good post, but at the same time let's also consider how much the average American debt carried on credit cards is $8000. As Jeff said people want it now and do not want to wait. They have become accustomed to declaring bankruptcy and walking away from their problems even if it does affect their credit. Is foreclosure the new bankruptcy?

There was a great post this morning Front Page of the Charlotte Observer that stated how builders in NC were offering homes with $1 down and now the communities are rife with foreclosures.

Also there is this feeling in America of who is to blame, not me, it must be the banker, the realtor, the home inspector, the seller, the broker, the lawyer, anyone but me!

Yes, it is our job to ask questions but the client makes the decisions, we are their agent, no one forces them to sign and they have to bear the consequences at the end of the day.

MAR

2007

Good post Rich. I like many other loan officers try to educate my buyers. I tell them how to improve their credit so they will be able to qualify for a better mortgage and nine times out of ten they don't want to hear it. Even the subprime lenders will give them a fixed mortgage for an extra one to two percent which seems high to them at the time, but is cheap in comparison to the adjustment two years later. Ideally, when I put a customer in one of these loans, I explain to them that they will need to improve their credit and refinance out of it in two years. Some people listen and end up getting the house they want now for less than they would pay for it in two years. On the flip side, if they continue their bad credit ways, they are "stuck" in a bad loan. As far as I am concerned , this is the buyers choice. They can always wait and save up enough money to buy their home in cash!

Thomas, Nick, and Michael: Thanks for the comments. Nick, your insight is right on: Americans like to blame someone else, and walk away from their problems. I was hoping to point out in this article that the only way to effect change is to point the finger of blame at one's self. It does little good for a realtor to say it is the buyers' choice. The Buyer has to say "it was my choice, and I made a bad one...how can I do better next time?" As Realtors, we can only say, "My client made a bad choice. What advice could I have given them that would have lead to a better result?" Unless we have been granted a General Power of Attorney by the client, we cannot make financial decisions on their behalf. We can only advise.

I wonder how many Realtors or Mortgage Brokers have ever called up their former clients who are now facing foreclosure, and said "I'm sorry. The advice I gave you didn't foresee this. I should have advised you differently. Let me see how I can make it up to you, and help you find a solution to your current situation." I doubt many, if any, people would be willing to accept responsibility like that, mostly for fear of litigation. It always amazes me that some people avoid doing or saying the right thing in favor of CYA.

More finger pointing is about to begin: SEC Investigates Subprime Mortgage Companies

Where will it all end? Will the SEC blame itself for not having policies in place that prevented this? Perhaps they should look at that....

MAR

2007

Rich,

Great post. It should have got featured but.....whom can we blame for that? Obviously this is a hot topic right now....and most likely for sometime to come. Very appropriate to stop the finger pointing as that will really accomplish nothing other than a few arguments and a few tempers to flair. Our focus has to be on weathering the storm and being a survivor....sooner or later a new dawn will rise.....can somebody help me make it thru the night?.....

MAR

2007

Ron, thanks for the comment. If you ever think an article should be featured, then click on the little red flag, next to the "bookmark" button and suggest that it be featured. The moderators cannot possibly read all the posts of 21,844 members (and growing faster than +100 daily!). It is no skin off my back that this one was not featured. (It did make it into the "Active Rain Week in Review - , March 12 to March 18, 2007 " post though.)

Rich,

Thanks for the info and I did note that and congratulations. This growth and activity is almost unbelieveable.

MAR

2007

Good post. Lax guidelines and human nature will always lead to excess...

Larry, thanks for popping in. And thanks for your post, Finally!! Real Data on the Mortgage Meltdown
It will hopefully put a stop to some of the "The Sky is Falling!" Chicken Little wannabes that have been selling newspapers and taking up airtime.

MAR

2007

Banks blame consumers. Consumers blame banks. Nothing changes. If people were to actually take responsibility for their own financial commitments, then things might actually change.

There was a brief article about this on the AP a couple days ago.

Some people even blame Alan Greenspan!

I was shocked to read an article that had the following data: 34% of home owners with a mortgage don't know what kind of mortgage they have, and 34% of people with an ARM don't know what they will do when it comes time for the mortgage to adjust.

For links to the article and more information read my blog: "a plague on both your houses"

Thanks for the link, Brian. I will check it out.

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