Who’s responsible for the housing crisis?

Just tune into talk radio, turn on your TV, or pick up a newspaper and you’ll likely hear and/or read the following statement regarding the current economic crisis:

Wall Street is unethical! “They” got people to sign up for bad mortgages, which led to defaults and foreclosures. Now look: "They" have caused a recession.

My personal experience

I remember vividly – as if it were yesterday – telling folks that based on their financial information, I believed they could not and should not proceed with purchasing a house, OR they might have to purchase one in a lower price range.

In almost every case, with help from their real estate agents, they had already picked out “the house” and received what I call the “how awesome your life will be by purchasing NOW!” lecture. (I trust you may be familiar with this.)

This is the way things usually unfolded: I would receive a phone call a few days later informing me that my recommendations were totally WRONG, according to their real estate agents, who always had comrades called mortgage consultants (another name for loan officers).

As a matter of fact, in all of such instances, these folks had already been “approved.” APPROVED? I remember a few times being called a liar who didn't know much about mortgages – seriously. There were also instances when agents and/or loan officers (or, more appropriately, "mortgage consultants") explained it this way: Our firm did not have “good loan programs.” Of course, the companies they worked for did.

The truth is that we simply choose integrity over commission checks (I thought tha was how it should always be in business, but maybe I’m missing something?).

How It Was Done

• These borrowers' incomes were misrepresented on the applications, or they took out “no doc” loans (meaning they didn't have to meet any income verification standards)
  
• To get these folks in the door, the mortgage companies used lower (teaser) rates that were scheduled to increase in a few years – with the explanation (by the agents and consultants) that once they got in, they would be able to refinance at lower FIXED rates. (Sounds wonderful, doesn't it?)

What Really Happened?

I am sorry, but misrepresenting someone’s income (knowingly or unknowingly) does not change their income in reality.

So what happened was that folks started missing payments within the first few months of buying the WRONG house, which in turn hurt their credit ratings. Then, when it came time to refinance, they were asked to provide proof of income. And guess what? They did not qualify for a reduced rate. Remember how they got in originally?

In desperation, they tried to sell and get out. You see, whenever there are too many homes with “For Sale” signs, and fewer people willing or able to buy those homes, real estate values plummet.

Meanwhile, since the sugar-coated "refinance to a LOW FIXED rate" strategy did not work out, many people saw their mortgage payments go through the roof (should it be a surprise?), which led to even more defaults, foreclosures and on, and on, and on.

The next time you hear one of those “experts” on TV say that the housing crisis was caused by excess inventory build-up, they are trying to say what I just explained in “expert language.”

So Who’s Fault Was It?

• The bank (Wall Street) that created the exotic loan program (to boost profits)
• The real estate agent who led people to buy the biggest house based on emotion instead of income (to receive fat commission checks)
• The loan officer or mortgage consultant who misstated the buyers' income and ignored affordability (to rake in big bucks)
• The folks who went along and actually signed up for the commitment (based on pure speculation)