I got to watch a very interesting documentary, House of Cards, on CNBC over the weekend that outlined clearly what took place to cause the current housing/mortgage crisis:
I thought the documentary did an excellent job in not politicizing anything and not overtly vilifying the people and companies at fault. But it made clear that there is plenty of blame to go around.
The program laid out a perfect storm of negligence, which ultimately led to where we are today.
- Government mandates that more American’s should own homes.
- Which leads to lenders going too far: eliminating restrictions and giving loans to just about anyone.
- Which leads to a housing boom.
- Which causes home prices to skyrocket.
- All of this in combination of the Federal Reserve reducing interest rates
- Leads to more and more homeowners to refinance, and cash out equity and get into more debt.
- Which leads to more shady and predatory lenders coming aboard.
- The tremendous spike in home loans (including sub-prime) created enough mass to enable these “loans” to be sold as mortgage backed securities to investment firms.
- These securities receive a AAA rating from Moody’s, which is a stamp that they are the best of the best safe secure investments.
- These securities are packaged up and offered as investments to other companies, intuitions, and other private investors.
Each line above added more fuel to the fire. The more momentum created led to more dangerous lending, more refinancing, more securities packaging, and even more risky “mortgage products.” All really a “House of Cards.”
Not one person or company up and down that line asked once, “will these people be able to repay their loans?” Or maybe they did and brazenly ignored it. Instead, it was gimme gimme gimme more. Just one stop along the line would have staved off this nightmare. Just one. But everyone dropped the ball, even the gullible “homeowners.”
On a personal note, I put equal blame on the homeowners who got into the mess too. Spare me the sob stories, please (on that note the documentary didn’t really sympathize with the homeowners too much—which is good). Instead of moving from Compton to Yorba Linda, why not find somewhere in the middle? Instead of cashing out your equity to get swimming pools and cars, how about just simply taking the lower interest rate?
I know there are plenty of other cases, but I’m referring to the people who wantonly got in over their heads.
When my wife and I were looking for a home, we had a pretty clear figure of how much we can afford each month. We knew that some time, somehow, the mortgage has to get paid—in full. This is simple common sense. And this is why people getting foreclosed on homes they can’t afford don’t get any sympathy from me. I live in a modest house, not a McMansion.
At the rate of debt these people were in, they didn’t own the houses. They weren’t homeowners at all. They were just debtors occupying space. When foreclosed, they don’t lose their house, they don’t lose anything because it was never theirs. It stinks that they have to brush themselves off and move somewhere they can afford, but they reaped what they sowed.
I consider myself a free market capitalist, but this mess just threw me for a loop. If there are no checks, then greed can and will find a way infect business. I don’t know if “regulations” and “government oversight” are synonymous, but someone needs to look over what’s going on at all time—and at some point put in restrictions if something doesn’t smell right. Like in this case, MAKE SURE THESE PEOPLE HAVE THE INCOME TO PAY THE LOANS BACK.
I kinda sorta touched on this in another post of mine, Credit – A Pyramid Scheme?
I didn’t have the time or energy to articulate it more at the time, but in the home boom craze, people got loans that they could never ever repay, this artificially sustaining (and inflating) a market. Home values were bunk. A vicious cycle.