Mortgage Crisis in the US??

Question

At the end of the day, isn't it all due to poor decision making??

Then why should the gov help those who make poor decision?? Why enable them to keep making bad choices??

Answer 1

I am very conservative and I am also in the real estate biz so I'll tell you the truth about it. It is not about bad decisions it really was about the loans here is why.

Never in history had I seen property values sky rocket like they did pre 2005. It was remarkable! So the banks had very very little risk. It became a supply and demand to get the loans done as the risk was so low (due to propertys going up and up so high).

So what happened is buyers shopped around for good rates and the competition was fierce. The best rates won out and you saw folks getting in for zero down and I mean z e r o.

Now...all this would be great and nothing bad would have happened as the chances of a r.e. market slow down and crash was practically non existent.

But then....the worst possible scenario happened.

The real estate market took a complete reversal and it sent shockwaves of panic through the market.

On top of that you have more bad luck..the rates started going up and if you look at how fast real estate had gone up before the problem is that it had gone up MUCH FASTER than the incomes of the borrowers.

So you had property bought at HIGH prices with High loans and borrowers not earning more to keep up then you had the 1-2 punch where values shot downward.

Now the owners couldn't refinance and if they had some lates FOR SURE nobody would touch them with a10 foot pole.

So you now have upside houses where what is owed on it is more than what it is worth.

So the next step is people tried to take more loans out, second loans if you will with what, if any equity they had. Some milked the houses for all they were worth and walked away.

So in my opinion if folks knew the market was going to change like that so fast they wouldn't have bought and gotten those loans BUT, and this is the big but....The borrowers and the banks went on what they were actually SEEING in the market place.

And in fact, throughout history, real estate has mostly gone up steadily and quickly during some years. During the Reagan administration for example they shot up fast and didn't come down. During the Clinton administration, although they didn't shoot up fast the prices did go up throughout the Clinton years.

Then in the Bush administration it actually went up higher than ever per %.

New home building also increased higher than ever...so now we have a glut of inventory on the market with scared bankers and now even in New York they are starting to sue some of the mortgage bankers which further causes fear in the market.

I cannot for a moment imagine that all those folks made poor decisions. I have met these folks and they are as sane as you and I. They looked at the market..they bought real estate that was going upward...they bought based on sound facts.

Nothing like this has ever happened in the real estate market at least in our lifetimes. So nobody would have predicted it.

To make a point some of the wisest Investors (you know the names) bought real estate only to see it plummet in value. Even they, yes...even the geniuses of finance can't predict the future. Yes even Warren Buffet lost money in the real estate he had just bought.

Truth is...Nothing is gauranteed ever and life is full of risks. In my opinion what has happened is a natural and normal thing.

Capitalism is not based on things being fair. Nobody says it is. But communism is failing miserably. socialism fails miserably...because by making things fair they take away from the productive and give to the unproductive.

With all its flaws it is still the best system in the world.

Answer 2

Correct. But the effects unfortunately go well beyond the people who made the bad decisions, and affect much else in the economy -- including people who had nothing to do with the bad decisions. Clearly, this is not a good thing. But what to do about it is not clear at all; my quick fix is to encourage lenders with troubled loans to do a work-out deal, which would postpone the due dates of increased payments caused by resets in exchange for a quarter-point bump in the note rate. The deferred amounts would be added to the note balance, possibly creating negative amortization. This should be available to anyone, not just a selected few who can satisfy the bureaucrats.

Answer 3

There are certainly irresponsible lenders, but there were also plenty of people who just wanted more than they could afford.

We offered ARM and Interest Only loans. I explained the pitfalls of those loans, and who these loans benefit and who they hurt...but I couldn't say, "You're just too stupid to understand that in 5 years you won't be able to afford the payments". We didn't offer any loans with teaser rates, but I sure lost a lot of loans to other lenders with teasers -- even after I explained how they could offer such a low rate and what was going to happen later.

The lender I work for isn't in trouble at all, but a lot of mortgage companies are. Even now, you'll hear a lot of mortgage companies on the radio offering deals that are too good to be true. And guess what? They're not true.

I talk to people every day who don't understand their own mortgage. In the final analysis, the borrower is the one who is responsible for his loan because he is the one who will get screwed.

And to echo an earlier thought, the bank isn't going to make a loan to someone who can't afford it. We don't want your house! It only costs us money to foreclose and unload.

Answer 4

Please understand that some lenders are responsible, some customers also, that being said, I have audited loans, with the greater % going to the fault of the lender. In most cases where there is a default, the lender misrepresented the client, and in some cases the L/O was the key factor. There is plenty of blame to go around, but I agree with Bush to make the private sector resolve this issue. I have submitted a plan to resolve the impending disaster that we are facing. 1. F.H.A. to appraise re-fi homes at 2004 market levels. 2. To allow owner occupied buyers 125% financing at current fixed rates. (give 5 years to build equity) 3. to implement 50 year mtgs. to help lower pmt. 4. Eliminate all stated income programs/ no exceptions. If you are using stated income, you are either not reporting all your income, and leaving the rest of us to pay taxes, OR, you do not make enough money to afford the home in question. Either scenerio is wrong, and the rest of the country will be paying for it in reduced values. Our industry was warned back in the late 80's, and told underwriters to U/W to the new relaxed guidelines. As time went on the guidelines/ safeguards/ verifications were non-exsistent. We are heading for a recession, unless we address this falling market, property values will continue to plumet.

Answer 5

Yep, acermill has it exactly correct.

Lenders offered mortgages to people that they knew could not afford it. They offered short term low interest rates, so that people could make the payments for a little while, but then when the rates when up, they couldn't do it anymore.

But all of this information was outlined in the contracts that people signed. Everyone wants to live in a big, fancy house, but no one actually thinks about what it is costing them. People are trying to "keep up with the Joneses" until they can barely stay afloat.

Answer 6

That would be correct, and the poor decision making is on the parts of both the lenders who offered this silly financing, as well as upon the parts of those who were naive enough to accept the silly financing.

Answer 7

I totally agree, if you are saying that the bad decision makers are the people who got the loans and the mortgage companies giving them the loans

Answer 8

Yes: bad decisions by borrowers, bad decisions by lenders, bad decisions by investors in securities that included these toxic loans. I say let the chips fall where they may...even though that is likely to be painful for many. D

Answer 9

Yes, could someone please tell me how I can get in on the teaser rates for the rest of my mortgage payments? Also how do I get part of my mortgage loan forgiven by the banks? I have heard that they are handing out all this free money - where is the line?? Wait, what? You say I'm too responsible and credit worthy to receive anything from the taxpayers? Only the irresponsible and criminal get to benefit from this bailout. Well, excuuuuuuuuuusssseee me!

Answer 10

Yes, both lenders and consumers share the responsibility for this mess but the ultimate responsibility lies with the hedge fund folks. They are the ones who dreamed up the concept of pooling these ridiculously risky loans and sold them to the worldwide investors who only saw the fast buck and not the potential collapse.

Greed is a universal motivator.