Who's fault was the mortgage meltdown really?
This is exactly what happened: A broker went to a family and told them that home prices were going up. (They were). They were told if they could afford a $100,000 house, then what they should do is take out a mortgage for $120,000, take the $20,000 up front, upgrade the house, and in one or two years the house would be worth $200,000 which they could then sell at a profit. (It's called 'flipping', and was so popular there were even TV shows made about it). People saw these TV shows and their neighbors all making this work and said "why not me too?" Sounds like a good investment, yes? The reason the broker did that was because the higher the loan, the more of a commission he made.
In my opinion, it was the bankers and brokers that caused the meltdown by knowingly "snake oil selling" to people who were unsophisticated buyers.
And if you think there are no unsophisticated buyers out there, ask any of Bernie Maddof's clients.
@padu: the government did not "force banks to lend money" where is your source for this?
- Anonymous9 years agoBest Answer
It was a lot more then that. Essentially what is to blame is sub prime lending. This allowed to people to qualify for home loans that normally wouldn't have been able too. For the main reason that the interest only payments were with in their income. It also allowed people to buy homes with putting little to nothing down on the loan. So lets say that increases the amount of home buyers by 10% then the median home price will rise as these "knew" buyers flood the markets. (simple supply and demand).
From there you had people who where in FHA type of loans but opted for Sub Prime loans because it allowed them to borrow more then they could really afford. Many of the people who did this where chasing a "dream home" that they KNEW they could not normally afford. This also increased the amount of money in the housing market and had people out bidding each other on homes that were for sale.
Then you had "investors" buying homes with sub prime loans. Paying interest only for 2 years then selling them to turn a profit and avoid capital gains taxes. This allowed "investors" to purchase more homes then normally would have been able too. Again adding fuel to the fire of supply and demand.
Then you also had a wave of people in real estate making a ton of money off of commissions. This also added fuel to the fire.
This all caused the median home prices to increase. With this increase people refinanced their homes or took out home equity loans. For various reasons such as upgrade their home or possibly start a business.
When the credit got taped the buyers were not there and builders where still building at rates for such a huge amount of buyers. Now home prices start to drop. Do to much supply and not enough demand.
Now people in interest only type of loans start to get behind on payments. Some start to have the "interest only payments" expire and can't afford the increased payment. Others are in ARM (adjustable rate mortgages) type of loans which means the interest rate isn't fixed as interest rates rise the debtor can't keep up with the increase. Now these people start to put their homes on the market but can't sell them at a "break even" price because again Supply has far ahead of demand.
Next the people who were making a living off of housing markets (lending commission and real estate commissions) start to get behind on their FHA loans because they aren't financing any loans or selling property.
This all sucks money out of the Entire Economy. Businesses start to go under because the real estate agent and mortgage broker is no longer doing business with them. Businesses start to go under because the people who got caught up in the frenzy of sub prime loans are now dealing bankruptcy and have no money to spend.
This again adds to people defaulting on their loans including FHA type of loans. The business owner (with an FHA loan) is out of work a long with his employees. They all start to default on their loans because they are out of work and out of income. Again adding more Supply to an already extremely over supplied market.
Now banks start to fall into the red as the default rate on their loans increases above the income rate. Meaning they are losing the money deposited with them. When someone defaults on a loan the bank essentially loses the loans value they might recover some of it by selling the home but if they made a loan for 500 thousand and the home only sold for 200 thousand they still take a 300 dollar loss. If losses become too big it over shadows any profits they have and now the bank can't pay for it's operations. Even worse is when depositors come to with drawl money from their saving account the bank doesn't have it (it was lost on defaulted loans).
In the end multiple groups are responsible for the mess.
1. The federal reserve allowed people to spend money they did not have.
2. Bank CEO and boards exposed them selves to more high risk loans then was reasonable. They did it because the profit margin on Sub Prime Loans is much higher.
3. The broker at the bank did not explain the full risk of a sub prime loan and all the possibilities.
4. The real estate agent is some what to blame (sorry but the cost of building the homes compared to what they were selling for made NO sense). Some homes were being built for $55-75 a square foot and sold for $125-200+ a Square foot. It makes NO sense.
5. The debtor/home buyers. Signed for loans that they could NOT afford and did not read the fine print of loan. They did not understand the full risk of sub prime lending and did not account for all the possibilities such as that their home would be worth less in the future.
Anyone who assumed the home prices would continue to increase is just plain stupid. Housing values have NEVER been stable and has always had ups and downs. It's always come in waves and bubbles. There was a housing recession in the late 80's and early 90's.
- ErikLv 79 years ago
Derivatives made an otherwise normal fluctuation in the housing market worse. They magnified the losses so much, that some banks went under, causing a credit freeze until things could be sorted out.
But yes, bad lending practices didn't help. Brokers were making a killing being middlemen, selling bad deals and walking away with their commissions. Homeowners weren't smart enough to read the fine print and understand the consequences of the risky mortgages they were buying.
- Spock (rhp)Lv 79 years ago
it isn't that simple and you know it.
Congress got the ball rolling, with Bill Clinton's able assistance, by trying to increase the rate of home ownership in the country. to do this, multiple government agencies and the GSEs were directed to insure, buy, and resell mortgages that used to be untouchable [subprime, alt-a, etc.]. Banks were arm-twisted via the CRA laws to lend where they previously hadn't been willing to lend [because they'd previously not been able to make a profit doing so.]
amazingly, the darn paper coming out the back end sold to investors. in part, it sold because the rating agencies, believing that nonsense about 'housing never goes down', rated the paper "AAA" when it should probably have been B- [subinvestment grade].
then wall street piled on top of the thing -- why should they sit on their hands when the GSEs were making huge profits flipping all this mortgage paper? FHA would still guarantee their paper, so it should [and did] sell just as well.
the schools are in for a chunk of the fault -- which school that you attended taught you the basics of consumer finance and mortgages? which taught you that housing markets are cyclical and do NOT keep going up and up? none, i'll bet.
then there's the people who signed papers they didn't understand, making contracts they had no idea whether they could fulfill or not. [it turned out not in many cases]
and then the Democrats in Congress after 2001 protected the whole mess, via the threat of filibuster, from President Bush [who, in fairness, was somewhat distracted by 9/11, Iraq, and reviving the economy].
oops! i left out the agencies who are supposed to police the banks and ensure that only quality lending takes place. That's FDIC, OCC, and state examiners. They've consistently failed to detect bad lending in real estate related areas since about 1920 and absolutely refuse to tell the banks to stop making those loans. either they're run by fools, are under the thumb of Congress, or are on the take. i'd guess numbers 1 and 2 -- after 90 years, if they were on the take, you'd expect that some would have been caught.
a hint about change -- all change is cyclical [including Obamanomics] except where humanity discovers a new to us invention or physical law. only changes caused by inventions and new physical laws are permanent -- and then only maybe [some new invention at an unknowable future time may later reverse the effect].Source(s): grampa
- widrickLv 43 years ago
banks being manipulated to make severe risk loans, via over whelming tension sort ACORN and community organizers. Acorn and the CO, relatively say in case you have no longer have been given a undeniable quantity of severe risk loans or minority loans to be greater precise then you certainly cant improve your on line business business enterprise into the encompassing factors. fact hurts maximum yet that's the genuine reason, no longer greed, or the present administration, additionally the existence of Fannie Ma and Freddie Mac with federal oversight that became into allowed to cook dinner their books so as that the congress an senate members in touch could make fortunes of the backs of the tax payers.( Obama is one listed for particular who has benefited sort the Fannie Mae issues.)
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- maxmomLv 79 years ago
I tend to agree. Yes, there is the sub prime mortgage debacle, but I saw many of my neighbors (smart, successful people) get caught up in the borrowing from equity craze, or selling their house high to go into an even more expensive home.
I could never understand how the banks could go along with this, since to me (a not particularly brilliant person) it was so obvious that we were in a hyper inflated housing market. I never thought my house would hold enough value long tern to justify that kind of borrowing, so I didn't borrow- or move.
Many of these people have been or are in foreclosure. These are not sub prime borrowers at all. Just folks who got greedy.
- Anonymous9 years ago
You said it yourself. The scheme was working. Who's fault is it that common sense doesn't show you that a scheme like that can't go on forever? When you are talking long term commitment as you would be with a mortgage you can't count on a stable economy for the whole term of the mortgage. I just doesn't happen. Who can't figure out that a house will be hard to sell in bad economic times? If you signed the paper it is on you. I went looking for my house and chose one that was under priced. Perhaps they don't teach let the buyer beware anymore. I would not be surprised with a do it all government attitude. Caveat emptor. It is a forgotten business standard now that the nanny state is the liberal philosophy.
- Bethany JLv 69 years ago
The Democrats with their idea that every American would own a home regardless of their income, education or earning potention or job. Banks were forced to look the other way and give all these low income people homes they couldn't afford. This is how two McDonald's counter workers bought a 3 million dollar home in California and couldn't even make the first payment (of course), It didn't matter because these mortgages were packaged and sold to foreign countries. The Democrats.
- Anonymous9 years ago
Clinton. He's the one who decided folks shouldn't have to prove they were capable of paying a mortgage when they buy a house. Congress, Fannie Mae, Freddie Mac and Goldman-Sachs are also culpable.
But I'm thinking it goes way beyond Clinton and I am not so certain this was a mere accident, but was designed by George Soros and the rest of the Bilderbergs. Google Daniel Estulin. He has linked the Bilderbergs to every economic disaster in modern history. These evil elitists make their money by crashing countries' economies. Clinton was just a puppet like both Bushes and 0bama.
- paducahbillLv 69 years ago
Was this a question or were you just wanting to make a statement?
The meltdown was caused by the government forcing banks to lend money to folks that should not be getting a mortgage in the first place. Then the banks sold the bad mortgages to Fannie Mae and Freddie Mac and they ended up with a bag full of junk paper and the folks quit paying on their notes and left them with junk and more junk. That is what happened. The government was wrong, and it came home to bite the entire country.
- Anonymous9 years ago
Right.. it's all the bankers fault. Certainly the guy who absolutely needed to buy that $500,000 house on a $45,000 salary holds no part of the blame..
You can call these people "unsophisticated buyers" or you can call them freaking morons.. doesn't change anything. They were stupid enough to spend more on a house than thy could afford. It's their fault.