Mortgage meltdown: An easily avoidable crisis

When I listed my Michigan home for sale in 2003, several months went by without an offer. At one point, a friend suggested that I contact their cousin, who was a mortgage broker. We could work out an arrangement where he left flyers in our home with info about how potential buyers could get a great deal on a loan from him. This, in turn, might get the house to sell sooner.

It turned out that the loans would be the interest-only zero-down payment type loans that are the fuel behind the current mortgage meltdown. When I discussed this with my real estate agent, she said that she could not support doing this, as she was ethically against these type of loans.

Later, in 2004, when looking to purchase a home in the East Bay of San Francisco, I was generally aghast at how high the home prices were. I wondered aloud to my real estate agent how anyone who did not already own a home in this area (or did not already have the money stashed away for a huge down payment) could afford to buy here. His answer was that they were all getting the same risky loans that my Michigan real estate agent had rejected. My California real estate agent was against them as well. As was I. We all saw the looming problem: If home prices ever started to fall, the homeowners could not afford to sell their homes because they would get less cash than they would need to pay off their mortgage. The result, if they could also no longer afford their mortgage payments when the adjustable rate started to rise, would be foreclosure. We all clearly understood this. And this was back in 2003 and 2004.

My point with these two anecdotes is that the current mortgage crisis should not have surprised anyone. The risks were clear. So how did it all happen? Who’s to blame?

I believe there is enough blame for everyone to share a bit. But not in equal parts.

The homeowners who purchased these loans deserve a bit of blame. They should have been aware of the dangers involved and resisted these ethically-challenged loans. This is especially so when you are talking about unnecessarily risking a home you have owned for 40 years so you can get startup cash for a new business venture (as was described in this San Francisco Chronicle article). I suppose some sort of “bail-out” effort is needed in the current environment. But there is a limit to what should be done. People who took foolish risks should not be rewarded by getting bailed out of their foolishness.

Still, showing restraint can be very hard to do when almost everyone else is getting these loans, your mortgage broker is pushing for you to go along, and there is no other way you can afford any home at all in an inflated market like the Easy Bay.

Real estate agents should have warned their clients away for these loans. Indeed, as my anecdotes suggest, many did. But not enough. Still, I understand the dilemma. If you are one of the few real estate agents taking a stand on this, it won’t stem the tide. All that will happen is that your clients will go elsewhere to get the loan, while your personal income plummets. It would have required a concerted effort from real estate agents as a group to do something effective. Simply depending on each agent’s personal integrity is not enough.

Mortgage brokers deserve most of the blame in my view. There were rules in place for decades that prevented these type of loans. In the last several years, these rules were abandoned so that brokers could make a quick buck at the expense of a desperate and too gullible public. The sub-prime lenders are the worst offenders here, and they are the ones in the most financial trouble now. But even huge institutions such as Countrywide contributed to this mess.

Finally, the Bush administration deserves a hefty amount of the blame. They could have acted to restrain the policies that allowed these dangerous mortgages to proliferate. But, as usual, they stood by and did nothing—letting the “free market” police itself. It’s the same attitude they take toward environmental regulations, communications policy, and more. It’s a sad case of putting the wolf in charge of the henhouse. I can only hope that next year’s elections send a clear message that we no longer want to support such policies.

Others could be added to this list. Recently, I have read speculations that offer institutions such as the Federal Reserve and Wall Street as culprits. Perhaps so. But my main point remains: Whoever is to blame knew that this day of reckoning would come and did nothing to prevent it. This was an avoidable crisis.

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