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.
Thanks, Ilyce — as cogent as anything I’ve seen for sure.
One thing unites each of your summaries — greed. Good ole human greed.
It would be “payback time” if so many good people weren’t suffering for the greed each of us joined in.
Joe, Thanks for your comment.
It would be good to have more people read the story and make additional comments and get a conversation started on this issue. It’s been three years and it seems like its business as usual in Wall Street.
Make sure you email the link to your friends and have them add their comments.
Home buyers applied to the lenders for the loans. Nobody forced them or bused them in with rainbow promises to do so. Even though there is a lot of blame to go around, it all trickles back to the home BUYER . A buyer doesn’t walk away from a car loan right after purchasing even though the value drops immediately.
That’s true that no one forced home buyers to buy. But there was a game to be played and the banks, investment houses, ratings agencies, politicians and others all had a hand in making sure the music continued to play as chairs were taken out. I believe it’s too simplistic to say that home buyers are at fault when millions of them have lost jobs and an overbuilt real estate market had it’s bubble burst. Using your car example is not the same. You can always take your car to another state and use it there when you find another job. You can’t take your home with you as the market tanks and you need to find another job. You can even drive your car to another state if you want to sell it there and get a better price, but with housing, it’s still location, location, location. And car values do go down after you buy it. That’s been a fact for quite some time, and it’s even expected. However, it that expectation was the same with real estate, no one would buy a home and no lender would lend on that home either.
It’s true that greed is the most inportant factor. All of the lenders figured they would get their money out of it somehow. They did not foresee how deep the drop would be. Also, companies encouraged their employees to sell. They gave lip service to the quality of the loans, but it was the quantity that showed up on the bottom line and, thus, on the employee’s review.
The buyer has the smallest amount of blame. How often do people buy a home? Most of them once or twice in a lifetime, if that. So, they are not very sophisticated, and if the seller — who is knowledgeable in real estate, much more so than the buyer is — says they can afford to own this beautiful home, a place of their own that will appreciate in value (so how could they lose!?), with tax advantages, etc., and that they can then will to their children, etc., who are they to contradict the seller?
The sellers DID NOT CARE that the buyer might lose everything. They know that the real estate market goes up, then corrects down. We were long overdue for a big correction. I knew it, and some of my friends agreed. But we’ve been around for a while and know real estate a bit. So the sellers absolutely had to know it. They were just blinded by the dollar signs in front of their eyes, so they did not think that it would be bad enough to affect the entire industry, and thus, them.
“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.” There is not a single real estate agent who will begin the process of evaluating a fair price for a house with wage demographics. During the height of the bubble, they were persuading people to buy houses with salary to price ratios of more than 1:10 in some cities by recommending interest only loans, negative amortization loans, and ARM. If the buyer raised concerns, they were told that they will be able to refinance when the house appreciates unnaturally.
Prices dropping was good, a sign that the market was recovering. If prices stabilize or begin to rise before the demographic foundation is back in place, the housing market will be getting sick again.
Right now, the housing market is being prevented from reaching recovery because of the shadow inventory, and the fact sellers are not realistic. They keep saying things like they think they are pricing their house cheaply if the price is significantly less than its so-called 2006 value, even though their asking prices are still far too high. They say their house is losing value without understanding that the house never had that value to begin with. And they are jealous of long-gone neighbors who managed to book that phantom equity. They think life is unfair if they can’t get that [phantom equity as well. Greed is just as rife among the 99% as the 1%.
Did any agent advise against buying during the bubble? No, they told people to hurry and buy before house prices went up further. They told people that a house is worth no more and no less than what someone is willing to pay, a statement that may be true but only if the demographic foundation is there.
Ms. Glink – nice overview of the mess. But, as the questioner implied, remove your politics here. The chain of events, and the relative fault of the players you note, BEGAN with the government wanting to get people into homes. I don’t think this can be denied. As usual, its the government/Congress that was the prime mover. We can’t just say “all share the blame” when ultimately, there would not be an issue in the first place if Liberals in Congress (and Bush to my Chagrine) wanted people in homes they could not afford Atlanta is ground zero, just look around.