Who Caused the Mortgage Crisis?
If you leave a kid alone in a room with a bowl of Halloween candy, do you think he is going to eat just one piece?
Lenders were giving out the candy: sub-prime mortgages and lines of credits to irresponsible consumers who were known not to be able to pay their bills in the past, and wonder why they gobbled them up with nothing left over to pay. What were they thinking? It is a billion dollar travesty learned the hard way that led several lenders into bankruptcy.
They not only deserve a scolding, so does the investment community for snatching up this sub-prime mortgage securities and as a result had to take billion dollar write-offs.
25% of the US falls into this sub-prime market and has some sort of adverse financial situation that would not normally qualify them for the prime market. That is a very BIG market for lenders to ignore, especially as they are jockeying for the biggest pieces of the mortgage pie. So they threw conventional economic wisdom out the door and started competing fiercely in this market space to the demise of everyone.
Lenders thought the risks would be worth the rewards, with interest rates being at record lows they had no way to go except up, so why not lock in these attractive looking adjustable rate mortgages and reap the benefits when rates rise. What they didn't realize is that Mr. and Ms. Consumer were taking full advantage of all this fabulous lending they didn't previously have access to and were going on a spending spree. Not only were they maximizing their mortgages, and lines of credit, they were also maxing out their credit cards. Oooops! What do you mean my mortgage payment went up another $500 because of the interest rate rise? I don't have $500, I already
spent it. Where am I going to put new my flat screen TV if you kick me out of my house?
How could banks think consumers would all of sudden become ultra-responsible in saving for the future or for unexpected interest rate hikes, when they never showed a capacity in the past for this kind of forward thinking monetary behavior.
If you give the car keys to your son and he crashes the car not once, or twice, but three times, you eventually stop giving him the keys to the car. Don't you? Common sense right?
Well with the lending crisis, consumers were crashing their credit histories left and right and no one seemed to care and lenders kept lending. Now, we have George Bush scrambling to negotiate a plan with these sub-prime lenders to give consumers another chance by asking lenders not raise the interest rates on some ARM's for 5 years. Is this really going to help?
Who is ultimately to blame? The consumer! Stop spending more money than you make people. Really ... just stop it. Take a free personal finance education
class, learn to budget and save for the future. You can do it.
posted by Ms.Money @ 9:45 AM
9 Comments
9 Comments:
I don't think that the lending institutions were left with a candy jar - they were taken in by someone or thing that then sat on the sidelines and watched. The cry for more money available to the poorer people for cheaper housing, and "flip that house" led to a method to allow it to happen. If it had worked, all would be great, but it failed. Find out who sold the lenders on the idea that the packaging of good loans with poor would protect all and you'll have your culprit.
It is so refreshing to read that someone else knows the truth behind this whole mess. Not a single participant in this debaucle should be bailed out. Not the banks for making bad loans, and not the consumers for taking out lines of credit they never should have had to begin with. Let each of these parties suffer the consequences for their actions. The government should neither bail out the banks nor the consumers. How else are they going to learn to be more responsible with their money if they are bailed out by the government? Also, why should I, a financially responsible consumer, pay for another individual's bad credit?
"How could banks think consumers would all of sudden become ultra-responsible in saving for the future or for unexpected interest rate hikes, when they never showed a capacity in the past for this kind of forward thinking monetary behavior."
Because in 2005, Congress, on behalf of the banks, changed the bankruptcy laws to make it MUCH more difficult for a consumer to declare bankruptcy. There was a big spike in bankruptcies declared just before this law took effect.
This removed the risk of lending to subprimes, or so the banks thought. At worst, a consumer becomes enslaved to the bank in a kind of 21st century sharecropping.
Let's not forget predatory lending practices, where banks pushed credit on people they damn-well should have known from credit reports couldn't handle it. I can personally testify to this: I am one of those subprimes.
But, in 2005 I saw this mess coming, cleaned up my debt completely, and am now even managing to save in spite of medical setbacks.
Ultimately, the consumer is to blame for this mess, but the banks gambled big on peer pressure to own big homes, big, flat-screen digital TV's, or the newest cell phone. The banks lost, and so did we all.
I seem to be missing something here! I worked in a bank and anyone that applied for a loan first had to provide income verification and the loan officer decided the credit limit of the prospective borrower! The bank told the consumer what they could afford based on income and decided what interest the BANK would charge in order for the consumer to purchase the home so his children would have a ROOF over their heads.
The reality is Home loans are for 15 to 30 years. How many people do you know that have been at the same job for 15 to 30 years since the REAGAN era.
Oklahoma is a FREEDOM at WILL to fire State. If your boss does not like the looks of your child they can and do legally fire people.
HUD sold FHA notes to Unscrupulous BANKS in the late 90's and bragged that HUD made millions selling the loans at discounted rates. This was under a REPUBLICAN controlled congress that would overide any Clinton veto!
OCWEN Federal Savings Bank had 150 multidistrict lawsuits for not crediting escrow to accounts correctly, billing customers illegal fees forcing Homeowners into what appeared to be fraudulent forclosures. At the same time Ocwen Financial Corporation is an unbrella for many Ocwen companies and some of them traded in securities holding mortgages. Ocwen was cited by the Office of Thrift Supervision for not servicing loans correctly.
Countrywide has been under investigations so now the REPUBLIANS want to give unscurpulous banks that paid into their compaign funds a big break and try and blame everthing on the consumers. Corporate Greed is responsible for this crisis.
What NO one seems to be concerned about is the Homeowner that was forced into homelessness due to corrupt banks.
When the people from Leahman Brothers cannot afford their mortgage due to a cutback now and end up in forclosure I hope that these judgemental and narrow minded individuals continue with thier blame the consumer game! But one thing for sure the CEO from Leaham Brothers will not have to worry about that, he made millions off of this because he was a bad CEO!
It seems incomplete to not document the government policies which contributed/caused the current Crisis. I agree there is plenty of blame to go around, but lets not forget the facilitators. Government encoraged these loans, and penalized banks which did not meet the quata's under CRA. Also of note is fact that govenernemnt is the one who added the morgage security process which allowed subprime loans to be packaged and sold as securities.
Government policies aren't the problem here. The CRA was from the 70s and most subprime lenders aren't even regulated under the CRA- that's just a red herring that Republicans are using to blame Democrats. And the securitizing of mortgages has been done by Fannie Mae (a public owned, for profit corporation until recently) since the New Deal- it was one of the more successful programs that got us out of the Great Depression.
To all who wish to blame the other party. Republicans are in the white house and so they get the blame just as the Democratic white house gets the praise for the boon of the '90's. Actually, through all the White House residents, there is one organization which held true to giving mortgages without verification. Congress was the proponent of it and there were those as last as 2004-05 who were chatising the regulators about being too harsh. After all, according to these congressional representatives, Fannie Mae and Freddie Mac were not in trouble. In fact, the then-chief of one of these organizations told the same congressional committee who were yelling at the regulators that by giving people houses, they were givng them a commodity which would never decline in value. He is not longer there but did make a nice profit when he left.
There is a video on You Tube which actually shows parts of the hearings and shows people defending the process which most bank emplyees like the anonymous of a previous posting look at and shake their collective heads. My experience, having paid 9.25% on a mortgage in 1976, is that without equity, you should not be allowed into the housing market. Just like without a car, you are not allowed on Interstate 5 or any other interstate.
The consumer to blame?! I guess ultimately the citizens are to blame for everything. Here we have a case where as SEC Chair Cristopher Cox says "many laws have been broken". Do you think many will be charged? If the consumer is to blame, it is not for their consumption, it is for not making their elected officials accountable, every step of the way. Democracy takes a wee bit of work.
B. McGrath
Florida
One thing seems to be lost in all of this, the Real Estate industry has been reduced to rubble by all this bad lending. Yes some Realtors were involved, but a lot never did any sub prime business. This is a double edged sword not only did they not cash in but a lot of relestate professionals have been put out of business with no chance to draw unemployment. You cannot put one of the largest industries in the country out of business and expect the country to prosper. a lot of the same banks that gave Realtors credit cards, loans etc are the ones largely responsible for thier demise. You cannot put your customers out of business and expect them to pay. hear that Chase, Citi, Bank of America and others. we need part of your bail out taxpayer money to survive. Fred S
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