There’s enough blame to go around in this housing crisis.
Q: Politics aside, if that’s possible, to what do you attribute the decline in real estate values? During Carter’s administration a law was enacted whereby lenders were required to lend without documentation and, during Clinton’s administration, Congress put teeth in it by suing and fining lenders who did not comply.
Here’s my $64,000 question: How can lenders and appraisers not know that a loan of $138,000 in 2008 would drop to a value of only $87,000 a year later? Don’t they have economists whom they rely on for projections?
There certainly are a lot of Monday morning quarterbacks now who are telling us that house prices won’t come back for at least so many more years. Surely the lenders are somewhat protected with a mortgage but, as experience has shown, it’s only worth the paper it’s written if borrowers walk away.
As a borrower, I thought I was somewhat aware of the market but, alas, I was way wrong. But, I believe lenders share a large part of the responsibility for the bad mortgages inasmuch as they must have foreseen the drop in values. What do you think?
A: A number of economists and reporters have written books (and even helped produce movies) discussing the causes of the housing crisis. You certainly can go back twenty or thirty years in finding early sources for the causes, but the bottom line is this: none of the checks and balances in the system worked.
We don’t blame the banks alone, although the banks have not done enough to assist borrowers at this time in refinancing or in figuring out a way to stabilize the residential real estate market.
Yes, there were government plans and incentives to get lenders to lend to lower income individuals and to lend in certain areas, but that alone would not have caused the crisis.
At the consumer level, many mortgage brokers and loan officers worked with (and without) the borrower’s knowledge to modify documents to suit the loan parameters and to create false documents to assist in the loan process. At the next level, it seems that many review and underwriting departments turned a blind eye to these documents and other problems with borrowers’ information.
So, millions of borrowers who couldn’t really afford their mortgages were granted loans. That in itself is a recipe for disaster.
At the next level, the lenders failed (in most cases) to retain skin in the game and sold off the loans to investors using Wall Street firms. The banks were able to sell these loans to investors by bundling them and creating new financial instruments. The Wall Street firms didn’t seem to care much about the soundness of these instruments as long as they could sell them and make fees in the process.
Wall Street firms could not have sold the financial instruments without the help of the ratings agencies that gave the highest ratings possible to some of these mortgage-backed securities. To put it another way, Wall Street firms were able to aggregate thousands of mortgage loans — including many to borrowers with poor credit — and create new securities, which they claimed had the same credit rating and ability to repay as the United States government.
And, you can also lay some blame on Fannie Mae and Freddie Mac, two governments sponsored agencies that encouraged lending, but failed to see the problems that lay ahead from loose lending guidelines. These companies became fixated on encouraging lending, increasing home ownership, producing higher profits for their companies, and pushing up their stock prices, while failing to see the structural problems that were developing in the housing industry.
Finally, the regulators were asleep at their jobs and failed to regulate the banks and other institutions that they were supposed to oversee. It seems that there were a fair number of states that attempted to regulate the lending industry only to be told by the federal government to stay out of that area of regulation.
We can’t say that borrowers weren’t to blame as well. There were many borrowers that did not have the income to support a home purchase and should never have purchased a home. Those borrowers should have known better but decided to move ahead with a home purchase they surely could not afford. There have been borrowers interviewed that had an income of $20,000 to $30,000 buying homes worth up to half a million dollars.
While you can’t blame them for wanting to live the “Lifestyle of the Rich and Famous,” we have told borrowers to keep the costs of home maintenance, real estate taxes and insurance in mind when purchasing a home. Those borrowers purchased homes that were far and above what they could afford – and they should have known better. The old adage is still true, if it seems too good to be true, it probably is.
That leads back to your question as to why banks never imagined such a huge drop in real estate values. The banks and other financial institutions were making so much money through the home buying process they never considered the negative consequences of real estate values increasing by so much, so quickly.
One measure you can use to determine where housing values are and will go in your neighborhood is to look at that neighborhood and estimate what people earn in a year. As a rule of thumb if people have a salary of about $50,000 dollars in a neighborhood, you can expect that home values should be between $150,000 and $200,000.
While not an exact science, if people have good jobs and can afford to buy a home, they can afford a home of about that value depending on where interest rates are and how much of a down payment they have.
In neighborhoods with lots of foreclosures and unemployment, home values will remain erratic and unstable. However, in neighborhoods where people have retained their jobs and there are some but not many foreclosures, you might see that home values may stabilize around values on the basis of what people earn at their jobs.
Given what people earn in their jobs, if you feel that wages will increase, you should see increases in housing values. But if you don’t think that wages will increase, then you probably won’t see an increase in housing values for some time. For house prices to go up, people have to be able to afford those higher priced homes. Only if gentrification or if home buyers with higher incomes move into those neighborhoods would you see home values rise.