As our country braces for the worst housing crisis in history, blame for the fiasco is shifting from one entity to the next. Estimates on foreclosed homes have eclipsed the million home mark. Foreclosures are on the rise and we still don't see an end or a solution to the problem. As I watch the nation's mortgage lenders go through their financial freefall, it makes me wonder. Who really is to blame and who, if anybody, should be bailed out?
On one front you have the mortgage bankers. These are the brilliant minds that force fed the people with interest only loans, low or no doc sub prime loans and 125% Loan to Value refi's. So why did they do it? That's easy. They saw the housing values on a steady rise and in some areas doubling and tripling values in only a year's time. So why not offer these types of loans. They knew that the houses would gain that value in no time. They could package their loans into a hedge fund, sell them on Wall Street and make a killing!
On another front you have the average citizen and a truck load of real estate speculators and investors. Joe homeowner is enticed by the prospect that his house has what seemed to be limitless rising equity so why not refinance, take some money out and go to Disney land! Right after buying a 54" flat screen T.V. and a Hummer H3.
Your typical real estate investors were eating it up as well. Buying, fixing up and building homes like there was no tomorrow. Home flippers were flipping, and home builders were building. It was all so easy and anyone could do it right? Well...
Let's not forget good ol' Uncle Sam who was loving the tax dollars that the new and upgraded housing brought into the local, state and national government. It was a boom time but that bubble that we used to hear about burst like a nuclear bomb.
Now that we have our volatile mixture of bleach and ammonia we can try to assign responsibility. The mortgage lenders claim that people should not have taken out the loan if they could not afford it and the investors made their own bed so lay in it.
Community organizations and advocates are screaming that the people were misled and enticed into accepting bad loans that they could not afford and did not understand. Both have valid points, now what is being done to stop the foreclosures?
Foreclosures have opened a gaping wound that affects the American people and our banking/lending system. The banks are all too willing to foreclose even though their stocks are collapsing and some lenders are going under. People who are facing foreclosure are just as willing to walk away and not look back.
What does this do for our future as a country? We will have millions of Americans who won't be able to get a loan on anything for years to come and banks that can't sell a mortgage backed security to anyone. No domestic or foreign investors will have any faith in these investments which translates into no money to loan to new home buyers. (We are already seeing this happen)
The FHA modernization bill that is being reviewed by congress has some highly controversial items attached with it. Many are referring to this as the Dodd-Countrywide bailout bill. If enacted, this will allow the banks with non-performing loans to dump them onto Fannie Mae to the tune of $300 billion dollars. This of course will be paid by the American people out of their taxes.
Why should the American people bailout a lender like countrywide who offered risky loans? It was a greedy investment decision with a lot of risk involved. Isn't that just a part of investing? You take the good with the bad right? You play you pay? In theory that is correct and private investors, builders, flippers and anyone else who made that investment mistake including people who invested in the mortgage backed securities are paying.
Now we have a big problem. If the big banks who offered these risky loans don't get some kind of a bailout, there will be no money to loan to homebuyers that are and will be in the marketplace looking to buy a house. When the Wall Street investors lose faith the money dries up. On that note, maybe the banks should have a bailout plan?
Hold on to that thought because here comes the flip side of the coin. If the MBA membership sees that the government will bail them out for their folly, won't they just do it again? It was only in the 1980's when the feds had to bail out the lenders from the savings and loan scandal. The people have a short memory but the banks... they know that in 15-20 years they can try another variation of subprime, no doc, 125% LTV loans, and they probably will.
Now let's get back to Joe homeowner. Should he have refinanced his house and cashed out with five grand. Probably not, but all of the pieces of the puzzle seemed intact. The appraisal came back with rising values. The neighbor down the street bought only a year ago and already sold it for a $100,000 profit. He can just refi in a year or two and get out of that ARM loan. At least that's what the mortgage broker told him. And, speculation about a housing bubble seemed completely unfounded. Bermuda, here we come!
POP! The bubble burst, Joe took a pay cut to keep his job and his house is now worth $80,000 less than what he refinanced it for and it is still dropping. He can barely make the payment and that great interest only loan is about to hit year three, which means his payment will almost double. All too familiar isn't it?
Right now there are over a million Joe's all of whom will not be able to get another loan for some time. Maybe they are paying their penance for being greedy, but what will this do to our economy? What if this turns into 3 million Joes who cannot get a loan for anything? Our free market economy depends upon goods being bought and sold in order to remain a thriving nation.
What are the answers that we are looking for? We all realize that foreclosures cannot continue at this rate. Banks are foreclosing at a record pace. Why don't they try harder to prevent foreclosure? Wouldn't it be in there best interest to turn there collections departments into home retention departments? Here is the simple answer. "It is not our policy or our job to seek a loss on our investment."
How about Joe homeowner? Why doesn't he try harder to get a loan remodification or work something out with the lender? The common response is equally as simple. "I called once or twice and they just told me to make the payment or lose the house."
As we all search for a reasonable answer to this problem the finger pointing continues. Maybe the government should give half of that 300 billion to try and offset foreclosure rather than just bail the banks out. What if communities get more involved with homeowner retention? Maybe the banks want to own these homes so that they can use it as leverage to weasel their way into the housing industry? They've tried before. Many people claim that this is just an effect of the market cycle and it will eventually right itself.
We are on a sinking ship that is listing heavily to starboard. If this ship sinks, it will create a whirl pool that will drag our country underwater for years. My opinion is that everyone needs to recognize this as a problem and work together to fix it. Everybody and nobody are at fault. The boom and bust are just a product of capitalism at its best and worst. It is part of the natural cycle that may only require a nudge in the right direction. In order to get the bilge pumps working, communities, lenders and the government all need to be involved in order to exact a fair and reasonable solution.
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