It's not just subprime
There is so much news about the growing problem of foreclosures, members of Congress and those running for President are tripping over themselves to figure out some way to bail out those who are likely to lose their homes to foreclosure. After all, the banks have gotten a little bail out, why shouldn't the poor homeowners get some help from the government too.
But everyone seemed to forget the word responsibility.
Sure, there were mortgage predators. Shoddy underwriting. Home buyers eager to be able to buy a home and cash in on the housing boom. Some borrowers lied. Some mortgage brokers and underwriters looked the other way. Wall Street packaged the whole shooting match and investors bought toxic paper.
Let's talk subprime for just a minute. Buyers obtained loans that shouldn't have been made. Wall Street figured out a way to loan money to high risk home buyers with poor credit histories and thought that they could charge a higher interest rate and make more money for the investor. What Wall Street failed to account for is that people with poor credit histories historically don't pay back loans so the bottom line is that higher interest rate will never be earned if the loan isn't repaid. It didn't figure in the calculations. Big mistake.
Let's move on to the home buyer who wanted to get in on the housing boom. It didn't really matter to them (or the lender) if they couldn't afford the real payment, they just wanted to get into a home. So the Option ARM, with a low teaser rate of 1% that adjusted monthly to a real rate combined with a negative amortization product was just the perfect loan product. A buyer would be able to qualify to buy a home at a deceitfully low rate, never mind the fact that the deficit on the lower than normal monthly payment would be added back to the total amount due and after a year, the borrower would owe more on their home than they originally paid. And then the rate would reset and of course the payments became completely unaffordable. Who cared, prices were soaring, they could refinance later. Big mistake.
And now, let's talk about MEW (mortgage equity withdrawal). This is not a purring sound. This is the sound of the home pretending to be an ATM machine. You bought a home for let's say $290,000. After a couple of years of amazing appreciation, the home is now worth $490,000. Didn't you really want to take a vacation to Europe, get a snazzy new car and of course, that old TV needs to be replaced with a new flat screen, after all, you're rich, your home is worth almost a half million dollars, you need to watch television in style. So you refinance, take a few hundred thousand dollars of equity out and blow it on toys and fun.
Ooops. All of a sudden the party's over. There is no more Kool Aid in the pitcher. Loans aren't being repaid. Lenders are forced to tighten standards. Fewer buyers can qualify. Too many homeowners realized they can't afford their payment and put their home on the market. Supply and demand, the great equalizer, puts pressure on homes and values decline. When everyone wants to leave a sporting event or a movie theatre at the same time, it's crowded as a line forms to get out. The inevitable result if and when a home doesn't sell and you can no longer afford the payments is foreclosure.
The net result of the current crisis will be this lesson: when you sign the papers to buy a home, carefully consider the word responsibility. We seemed to have forgotten it for a few years in the Charleston real estate market and to a greater degree, certain other markets around the country.