February 26, 2009

Thought for Thursday - My Take on How We Got in This Foreclosure Mess

Over at Lynt's blog she wrote a blog post called "Random" and among other things asked the following questions and answered them:

There are three foreclosure properties in my neighborhood. Am I pissed that folks got in over their head, sucked in by ridiculous loan availability when I played by the rules and now have declining property values? Yes. Do I think the government is to blame? No. I think bankers are to blame. And people who weren’t raised to buy what they could afford. An interest-only loan? On what planet does that even sound like it makes sense?

Here's how I responded:

Well...enjoy that wine while I natter on about the loan foreclosure debacle. 1st - actually I do blame the government because going back to at least the Nixon administration (and in both democrat and republican administrations) various laws had been changed that eventually led to the situation where greed was able to take over unchecked (we call part of it "DE-Regulation").

2nd - let's talk more about that greed. I'm not sure which came first the lender's greed or the realtor's greed. But I tend to think it was the lenders because they had to develop and make more available the products that the sellers of real estate start "recommending" in order to convince buyers to buy too much house. I have a financial client who did NOT come to me first when they decided to start house hunting. Had they come to me I would have told them the most they could afford on their income was about $150,000 at prevailing rates and that was on the high end. But no, they went to a real estate agent who was GREEDY and probably had her income based on selling a certain number of homes at a minimum value of $250,000. Since there were mortgage loans available that could be "tailored" to fit the client's income (read "interest only" loan) of course she ONLY took them to see $250,000 homes. They fell in love with a house that her recommended lender could finance and THEN they called me. Yeah, I burst their bubble and we didn't chat much for 3 years (of course, that's because they bought the house). Even the wife's banker brother told them not to do it, but by then they were in on the greed game. Of course, somewhere in this scenario are appraisers who propped up the market values somewhat, because the lenders with the "creative" loans threw business to them...hence more greed.

Have another glass of wine now...

3rd - You might wonder how these buyer's got the idea to finance 100% of the homes and do so without even having money for closing costs. Greed again. I believe this started on a large scale with builders. They began offering money towards closing called "seller's concessions". The actual idea stems from HUD/FHA rules that allow sellers (or supposedly non-profit companies) to provide the buyer with up to 3% of the selling price toward closing costs and, depending on some other factors, an additional 3% for a down payment so that the financing isn't 100% of the price (although they add on a Mortgage Insurance Premium up front, so it's nearly 100% financing anyway...don't get me started on that stuff...heh). Anyway, realtor's that were trying to resell existing homes had a hard time competing with all the new homes what with the new homes being NEW and having access to this creative financing, so they started borrowing the same ideas. THEN the lenders figured out that they could package up all the loans and sell them as investments, so they started offering these creative loans to existing homeowners so they could refinance all their debt. More greed. Then the homeowners saw their homes as debit cards...OMG! You should have seen the really weird loans that came out of that idea...THOSE really haven't gotten the press the interest only ones got...again, don't get me started!

So that's my somewhat educated take on the problem. Now I think I'll get myself a glass of wine...heh.

BTW, my clients decided to move and fortunately sold their home between the two major waves of foreclosures here in Colorado. They only had to bring $2000 to the table to get out. It was rather expensive rental property (they never really owned anything, if you ask me, and it was almost 50% more per month than their previous rent was in a similar size house)...but they did learn their lesson and we're back on speaking terms again.


Anonymous said...

Greed and hort-sightedness created our economic woes in general. Our ideas od what we "want" have somehow merged with what we "need" and even first-time homebuyers go stright for the dream house option even when they can clearly bot afford. Ditto vacations, cars, clothing. Excess will bite you on the ass every time.

dmarks said...

At the root of a lot of this are Fannie-Mae and Freddie-Mac. Last time I knew, these were government agencies where the head honchoes were still pulling in yearly paychecks in the tens of millions.

TheWeyrd1 said...

citizen...did you respond after a lovely meal with wine? Just askin'...lol And yes, I agree, people have confused wants with needs!

dmarks...being quasi-governmental, of course Fannie Mae and Freddie Mac loan products could have been affected by government changes to regulations. But keep in mind many of the creative financing loans out there were NON-Conforming. That means those loans did NOT follow regular Fannie Mae rules. Of course, regular Adjustable Rate Mortgages can be Fannie Mae or Freddie Mac. I'm not sure that the interest only and the "pick a payment" option ARM's were considered Fannie Mae conforming though.

jennifer from pittsburgh said...

Wow, Weryd, you brought some much needed reality to the surreality of how the housing crisis could bloom.
Thanks! I'm just glad that I never once wanted to live above my own means and just had to have something that 'I fell in love with'...except for that one ex-gf, but that's another matter...and never again.

TheWeyrd1 said...

jennifer...I totally agree with living below one's means. However, most of the folks that ended up with "creative" loans thought they WERE living within their means (even if at the top end of their means), because the industry, which has the fiduciary responsibility to explain that the customer can't afford the house with a regular fixed 30 mortgage, didn't tell these folks the truth (despite the truth in lending requirement...greedy bastards)! That said, when I bought my condo for under $85,000, I got a load of crap from "friends" who thought I should be able to afford to build a house on my land or at least buy a small house in town or a bigger condo. The home construction cost was originally estimated at $150k with the land, but due to Katrina, it had already ballooned up to $175k when I bought the land and I figured it would likely end up around $200k by the time I finished construction. Then with the gas prices zooming up I didn't want to commute that far, so the project is on the back burner. Even when I explained this, the "friends" assumed that with my perceived income that I should live up to my potential...HA! Anyway, I again look like a financial genius for not following the herd.