Maybe one of you can help me clear up my thinking:
Millions of Americans took out mortgages that were too large. Usually when people spend unwisely, they take the blame personally. Why this time are 'predatory lenders' and 'banks' being blamed?
Put another way - people blame themselves when their credit card spending is too high - they don't blame Target - how is this different?
I suspect the answer has something to do with the large size and high sophistication of mortgages. But help me out.
1. gov't for knowing what the banks were doing.
2. banks for bad/dirty practices to make more money.
3. people for not being smart enough to own a mortgage.
In that order.
Government, who (through the Federal Reserve System) controls the credit market with an iron fist, undermining the free market.
The government enabled/allowed the banks to take advantage of the system and sell over priced/unrealistic loans to people who should have been better informed/realistic. Everyone in that equation is to blame to some extent because it doesn't happen if 1 of the 3 behaves properly.
All of the above.
People: many people got caught up in housing hysteria and banked on housing prices continuing to rise. A lot of people bought houses they couldn't afford in the hopes of making money. Others, seeing themselves priced out by rising home prices, bought houses on the edge of what they could afford thinking they could always sell in a couple of years if it was too much for them. When the market collapsed they found themselves in an underwater mortgages or continue to teeter on the edge of default. Debt overhang which continues to dog the economy and likely will for a while.
Banks: include the sub-prime mortgage shops in this category as most of the unscrupulous predatory lending originated with them. They were making money hand over fist and didn't let due diligence get in their way of making more. The incentive was to make money and there was little short-term downside for them as most promptly sold the paper after closing anyway. The banks should have been a brake on the system, but frequently acted in the opposite way.
Govt: the Fed for keeping interest rates so low for so long and regulators for not doing their jobs effectively.
I'd add two categories to round out the picture:
Wall Street and Ratings Agencies who worked together to package shit mortgages into triple A rated shit investment vehicles which spread the problem.
OP, what you have to understand is that the banks were making money off of bad loans, so either way they were in the black. They didn't care about whether people were able to pay back the mortgage b/c by the time the first statement went out, the mortgage had been bundled and sold.
Speculators would bet that it would default and make money off of someone losing their house.
As banks did more and more of this, the market begins to tank and they begin losing money. Never fear though, b/c the banks can get a 0% loan from the US Government (funded by our tax dollars), which they immediately turn around and lend back to the government at 4%. They also use this money to lend (back) to us (as taxpayers, we funded the damn bail out) at 4-7% for mortgages and 25% for credit cards.
Now, what happens when you as a bank customer default on your debts? Do you get bailed out? Do you MAKE money on the mistake by getting interest free loans that you can then lend back to the sucker that gave you the money at 4% or higher?
Lets not forget that by bailing out these banks, we basically rendered them unable to fail, so their credit skyrockets. They can get money/assets from anyone in the world b/c the lenders know the US Government won't let them fail. They are REWARDED for being financially maniacal.
Lets not forget that the responsible banks - who did not use these irresponsible and corrupt practices - are now failing left and right b/c no one wants to lend them any money. They cannot win business against these enormous banks b/c - despite their good behavior and solid business practices - their credit is nothing compared to the infallible US Goverment-backed banks.
SOOOOOOOOOoooooooooo, to answer your original question... A man walks into your living room with $10 in his pocket and wants to buy your house. He has nowhere to go and a family to support. You ask him if he has any additional money and he says no. You look at his bank account and you see that he has no money. You write up some bullshit contract that makes no sense, pat him on the back, tell him everything is fine and throw him the keys. You quickly sell off the debt to some other corrupt moron who is going to bet against it. You speculate on it too. When the guy doesn't make his payment, you ruin his credit and take back the house. Any losses you might have taken are refunded by Uncle Sam. Guy is now destitute and has nowhere to lay his head at night. He is bankrupt and cannot get credit for at least 7 years. He is done.
Think about it. You're the one that made the bad deal, not him. Why is he suffering while you are getting paid?
Here is an easier analogy. You walk down the street and a bum asks you for a dollar. You give it to him under the condition that he pays it back plus interest. You don't see him again. Who's fault is that?
Listen, not all foreclosures are the banks fault, but when foreclosures skyrocket like they have been doing, something is rotten in Denmark. It isn't hard to see the ridiculous lending practices are not only irresponsible, but downright illegal. In a free market, the banks would suffer and shut their doors. In our NOT free market, the banks are rewarded! This doesn't stop at banks.
There is corruption at the highest levels of business and politics. It is wide open and it needs to be addressed.
I AM A CONSERVATIVE. CONSERVATIVE PRINCIPLES HAVE LONG BEEN ABANDONED BY THE REPUBLICANS.
Here's a quick overview:
- Federal Housing act.
- Low interest rates by Fed which results in banks promoting low interest mortgage loans.
- people overestimating how much they can buy a house for
banks allowing interest only loans to under qualified borrowers. and people thinking they can flip the house as the price goes up.
- banks repackaging crappy loans thinking that diversification will help when if a few went bad when in reality the risk is systemic; not in silos.
- then banks having liquidity problems when the packaged securities went bad and had to post collateral.
I would hold culpability on the consumer. fact is not everyone should own a house because they can't afford one. it's unfortunate that the people in our country do not know how to show financial restraint.
Giver Away Of Freedoms wrote:
....
Here is an easier analogy. You walk down the street and a bum asks you for a dollar. You give it to him under the condition that he pays it back plus interest. You don't see him again. Who's fault is that?
...
This is the exact example I always think of when people try to lay all the blame on the consumer. Consumers were not innocent but I hold the banks to a higher standard.
agip wrote:
Maybe one of you can help me clear up my thinking:
Millions of Americans took out mortgages that were too large. Usually when people spend unwisely, they take the blame personally. Why this time are 'predatory lenders' and 'banks' being blamed?
Put another way - people blame themselves when their credit card spending is too high - they don't blame Target - how is this different?
I suspect the answer has something to do with the large size and high sophistication of mortgages. But help me out.
I blame all three but weighted differently and in the following order:
1) People - No matter WHAT banks or governments ALLOW you to do, YOU are still ultimately responsible for the decisions you make. The people who took out these bad loans get the bulk of the blame...at least 90% of it, and really, I want to be hard core enough to say 100%, except that the government can't come off scot-free here.
2) Government - Specifically the CLINTON Administration. I liked Bill Clinton and thought he was a very good president, but his meddling with the Community Reinvestment Act in many ways handcuffed banks and forced them to make risky loans to bad borrowers.
3) Banks - They could have tried harder not to make as many bad loans as they did, but due to #1 and #2 above, they felt compelled to do so to keep up with the competition.
Flagpole wrote:
1) People - No matter WHAT banks or governments ALLOW you to do, YOU are still ultimately responsible for the decisions you make. The people who took out these bad loans get the bulk of the blame...at least 90% of it, and really, I want to be hard core enough to say 100%, except that the government can't come off scot-free here.
You are usually a pretty sharp guy, but you are glowing with ignorance here. I worked in mortgages from 2000 - 2003. We pushed bad loans like a mother. We had bad loan GOALS. I was at a big bank. We made money off of bad loans. We sold them off, lumped with other bad loans and book-ended with good loans to spit-shine the offer.
Honestly, you are way out of your element here, Flagpole. You sound like an idiot.
Human nature is at fault for the housing crisis. One thing people must keep in mind is that the US was not the only country that had a housing bubble (many other had much bigger ones), so you cannot claim that it was the fault of a single government or its central bank.
The way people value housing is mostly to blame. They look at historical prices and growth to determine future and current value. When they see that a house in a certain neighborhood has risen in value by 8% annually, they automatically assume that it will continue at that pace in perpetuity. As more people buy houses on account of their above market returns, the rate of return accelerates. The bubble grows to an unsustainable level and then collapses.
Low interest rates, government guarantees, deregulation, derivatives, and ignorance all played their parts to exacerbate the problem, but the fact of the matter is that all of those problems would have been self correcting had the behavior of the market not been fundamentally flawed.
Mortgage companies.
They are the professional who are supposed to know everyone's ability to pay on a loan.
They have underwriters to validate everything.
The average person is not finacially savy enough to understand all of the implications. If the bank says they qualify, then it must be.
The mortgage companies that bought loans to be serviced from other companies that originate the loans didn't do their due diligence in checking the paperwork.
And they made an ussumption that values would just go up so it didn't matter if they had to foreclose. They would still profit.
Then the folks at AIG sold mortgage default swaps as insurance on mortgages to make an easy profit. Mortgage companies were enboldened by this insurance and felt confident in accepting all loans. So people that normally couldn't afford a home could bid high, because they had pre-qualified loans. And the number of offers on each home pushed prices up.
And since the values were rising, risk of loss from foreclosures went down. So they approved more loans. And so on.
If you wanted to buy a house, you had to pay a lot.
Many financial professionals didn't know when this would stop, so the average person surely had no clue when this owuld stop.
If you didn't buy a house now, it looked like you may miss a chance to ever buy a house. So people bought to get in. And build equity. The banks OKed it. It must be OK to do this.
Now, when people run up credit card debt, they aren't chasing rising prices and trying to beat rapid inflation.
The items will be there next year at about the same price. Even cheaper in the case of electronics.
Home ownership is a point of pride and a big personal achievement. A mortgage is considered good debt. A way to build equity. There is an opportunity cost of not buying a house. So the credit card debt comparison doesn't work for the individual.
Yes. Maybe you knew what you could afford and didn't bite off more than you could chew. But you are still affected by the actions of others.
The banks blew this in search of a quick buck. They didn't do their job in their risk assessment.
agip wrote:
Maybe one of you can help me clear up my thinking:
Millions of Americans took out mortgages that were too large. Usually when people spend unwisely, they take the blame personally. Why this time are 'predatory lenders' and 'banks' being blamed?
Put another way - people blame themselves when their credit card spending is too high - they don't blame Target - how is this different?
I suspect the answer has something to do with the large size and high sophistication of mortgages. But help me out.
None of these are mutually exclusive and they are all to blame.
The government because of the lending environment they created. They kept interest rates super low and created huge incentives for the banks to keep giving out mortgages because they were guaranteed by Freddie and Fannie.
The Banks because despite the huge incentives that the government was creating they were only looking in the short run and just assumed that the housing market could never crash all over the country at once, they assumed the risks would never be realized and entered no hedging positions until it was too late.
The people because although the banks were pushing heavily on them they still ultimately had to sign the contract. I blame the people the least though since the government was constantly pushing home ownership as the "way up" and the banks were less than clean in pushing these mortgages.
The really scary thing though is that the government is right now trying to reinflate this bubble which literally decimated the American people and has resulted in a still ongoing recession (yeah I know what the statistics say) which could get much much much worse.
I know you did...fueled by punitive action from the Federal Government if you didn't which is why they get more blame than the banks. Also, the people still remain #1, because no matter how hard you would have tried to sell ME a bad loan (if I weren't in position to borrow or the terms were not good) I would NOT have purchased.Seems that you were just a pawn and didn't know WHY you were pushing bad loans. The idiot here isn't me brother...you seem to not know how it all worked. I DO know how it all worked.Ha! You pushed bad loans huh? How does that make someone buy? PEOPLE are to be held accountable when they sign up for something brother...even if people like you encouraged them to do a bad thing. Man you are far off here calling me an idiot.
Old Banker wrote:
Flagpole wrote:1) People - No matter WHAT banks or governments ALLOW you to do, YOU are still ultimately responsible for the decisions you make. The people who took out these bad loans get the bulk of the blame...at least 90% of it, and really, I want to be hard core enough to say 100%, except that the government can't come off scot-free here.
You are usually a pretty sharp guy, but you are glowing with ignorance here. I worked in mortgages from 2000 - 2003. We pushed bad loans like a mother. We had bad loan GOALS. I was at a big bank. We made money off of bad loans. We sold them off, lumped with other bad loans and book-ended with good loans to spit-shine the offer.
Honestly, you are way out of your element here, Flagpole. You sound like an idiot.
1. government- They took away the risk from the home owner and banks. That's the big check that keeps everything in line. The government acted like the reason poor people weren't getting loans to buy home was because the banks were being mean and discriminating. No, the banks knew not to lend money to people that have no means to pay it back.
2. the banks- they did what they are made to do, make money, but at some point they got greedy.
3. the consumer- they were sold on these loans, not "approved", but they too went too far. Interest only loans, "pay what you can" loans...
Old Banker wrote:
Flagpole wrote:1) People - No matter WHAT banks or governments ALLOW you to do, YOU are still ultimately responsible for the decisions you make. The people who took out these bad loans get the bulk of the blame...at least 90% of it, and really, I want to be hard core enough to say 100%, except that the government can't come off scot-free here.
You are usually a pretty sharp guy, but you are glowing with ignorance here. I worked in mortgages from 2000 - 2003. We pushed bad loans like a mother. We had bad loan GOALS. I was at a big bank. We made money off of bad loans. We sold them off, lumped with other bad loans and book-ended with good loans to spit-shine the offer.
Honestly, you are way out of your element here, Flagpole. You sound like an idiot.
____________
the problem I have with blaming mortgage companies is that they are salesmen - salesmen around the world sell bad products every day. Is that criminal or unethical? Retail mutual funds are usually terrible products - do we criminalize the behavior of mutual fund salesmen?
In a capitalist society it has to be buyer beware ultimately.
But on the other hand - maybe the reason mortgage companies and the banks that profited from bad loans have to be held to a higher standard is that a bad mortgage can ruin a life, while a bad mutual fund probably won't. Theoretically a bad product and a bad mortgage are the same, but in the real world, they carry very different weights.
Interest rates are lower now than during the bubble but it isn't causing housing to go up.
That's because now, they are validating income and making sure that the borrower has the ability to pay back the loan.
Now, the risk is greater because they can't profit from a foreclosure.
Even if people wanted to overspend right now, they can't.
The banks won't let them.
The banks have controlled this the whole time.
X-Runner wrote:
Interest rates are lower now than during the bubble but it isn't causing housing to go up.
That's because now, they are validating income and making sure that the borrower has the ability to pay back the loan.
Now, the risk is greater because they can't profit from a foreclosure.
Even if people wanted to overspend right now, they can't.
The banks won't let them.
The banks have controlled this the whole time.
1) Good. People should not "overspend".
2) Banks don't control people. Are we robots? Banks provide a service, and I, as a discerning person, can decide to use their service or not. Mortgage calculators are everywhere on the internet, and you don't need to be a math wiz to determine if you really have enough income to afford a certain mortgage or not.
3) Under the revised Community Reinvestment Act, banks would be punished if they didn't provide loans to people who couldn't afford them. It was a bad deal. Clinton wanted home ownership for everyone; perhaps a lofty goal, but not everyone should be a home owner.
Anyway, the blame trail remains...people first, then government, then banks.
Probably going to get flamed for this.
we just lost our house to foreclosure and I believe that we were 100% to blame. we were pressured by family to get into the market, bought at the peak, and then lost big time. lost even more when our incomes stagnated for the next few years. But ultimately, we signed, so we're responsible.
However, losing our house was a wake up call we needed. We are 1000% better with our money. We're making better decisions, saving more, spending less, and thinking long term. we also learned that in many cases a house is not an asset, but a liability. We may not buy a house again until we can pay 50% down or more.
I hope that lenders and the government also learned something, but I'm skeptical.
I think a lot of people in this country needed a wake up call, and it remains to be seen if it will stick. It's unfortunate that so many innocent people got pulled under in this. But again, I feel that I only have myself to blame for our personal issues.
The Community Reinvestment Act is not the reason for the housing crisis, Flagpole. Banks were making truly awful loans because they were making huge amounts of money off of them and were selling the loans immediately! They didn't need to have their arms twisted.
A big cause of the crisis was adjustable rate mortgages, which often had teaser rates that would reset to a higher rate in a year or so. People should not have been taking these loans, but unscrupulous lenders were doing their best to gloss over the danger of taking an ARM that would reset to a rate people couldn't afford.
Wall street firms were buying up these loans, bundling them into securities, and selling them on the market. The ratings agencies gave garbage securities AAA ratings because they were incompetent and people on Wall Street were gaming their ratings systems.
Of course then you get even more complicated, with the creation of credit default swaps as an insurance against the terrible mortgage securities, which created an extra layer of losses when the ARMs reset and the market started to slow down. Banks that were caught holding CDS's when the "AAA" securities started to blow up wound up being on the hook for billions and billions of dollars
Read The Big Short. It explains what was happening leading in to the crisis very well, and shows that the government's emphasis on home ownership played only a small role. It was mostly just irrational greed on the part of people who should have known better, from the homeowners to the banks.