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
2 Comments
2 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?
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