You know, I have heard some people argue that folks who stop paying their mortgage are losers, who are driving the value of their neighbor’s homes down.
That’s a pretty narrow view of the situation.
Now, I know there have been abuses out there, and I know there are people who have walked away from homes they could afford to hang onto, but there are plenty of people who have been caught by the downturn and don’t have much choice but to walk.
But let’s take a look at the chain of responsibility.
Who began making loans available to anybody who had a pulse?
Who encouraged their representatives to sell as many loans as possible and collect fees?
Who used their huge marketing dollars to encourage people to take their equity and buy new furniture, new cloths, new cars?
Who stopped doing their due diligence, despite having the resources and where-with-all to do so?
The answers to all those questions are “the lenders!”
It used to be said that lenders would only lend to people who didn’t need the money. Somewhere along the line that old adage was thrown out the window, along with sound banking practices.
And why?
Because, Wall Street got involved. There were big time investment firms that began snapping up these mortgages as quickly as the banks could write them.
Often the lender who wrote the loan had sold the loan for a profit before the first mortgage payment was made. So, why bother with the expense of doing due diligence to make sure the borrower was credit worthy? It wasn’t going to be their problem to collect?
They wrote the loan, collected upfront fees from the borrower, and immediately bundled and sold the loan to investors tripping over each other to buy them - making money on the backend, as well.
The lenders then took that money, and rolled it into new loans. The more often they could “turn” the money, the more they made. So, speed was important.
As long as property was appreciating, they simply did not care who borrowed the money, because the increasing values of property reduced the risk of the loan.
But, in truth, they didn’t really care about the risk, because they knew they would have that loan sold to an investment group before the ink dried.
They were more concerned with lining up more borrowers. If you recall, you’ll remember TV ads, billboards, radio ads, newspaper ads all encouraging people to take advantage of zero down, no doc loans, or refinances. Or what about those zero interest rate credit cards?! All those creative ways to side step lender requirements - like the 80/20 loans. These were used to get around the requirement to have 20% down, to avoid private mortgage insurance. Or the home equity loans, where they’d loan up to 110% of the value of your home?!
The point being, lenders were using their substantial resources to encourage consumers to leverage their credit to the max.
With all their resources and in house economists, you can’t tell me they didn’t understand the risks involved. Obviously, as long as property values increased, all was good. But they must have had long term projections that foresaw the impact of a downturn in property values. They had to have seen a slow down coming, yet continued forward, business as usual.
They may not have foreseen the extent of the downturn, but they had to have seen a slow down coming. You know, they all had high paid economists using the most advanced technology to predict the economy. They knew the risk, and were willing to take that risk in order to make more money.
What about the argument that the consumer signed the contract and knew what he was signing. Well, yes and no.
Have you been to a closing in the last 10-15 years? It was all about speed of processing. The sooner everything was signed the sooner everybody got paid.
The closing agent often ran through the docs stating, “And this page says..., sign here.” If a consumer actually wanted to take the time to read each document, the closing would have taken forever, and there would be a lot of finger taping and sighing. Not to mention those “looks that could kill.”
Besides, have who read some of the closing docs and mortgage papers? That stuff is not written to be understood.
Should the consumer have read and fully understood what they were signing, absolutely. In the practical world, it just didn’t happen. Rarely did a consumer read the closing documents, let alone hire an attorney to review them.
Herd ‘em in, herd ‘em out..
So when a debt collector starts throwing the “loser” stone, they need to remember that the lender was a fully engaged participant. Additionally, of the participants, the lender was the more sophisticated, knowledgeable, more capable participant who actively solicited consumers to use the credit available to them. These same lenders most often waived their opportunity to do their due diligence of the potential borrower and by doing so fully accepted the risk they were taking in agreeing to loan funds to these individuals.
Oh, and one other thing about the consumer signing a contract... In that contract is usually a provision that says if the borrower does not make the payments as outlined, that the lender can seize the property. The lender agreed to those terms, as well.
Obviously, the lenders was OK with the terms since they wrote them. So, what’s the fuss if the home buyer walks. The fuss is, the lender doesn’t want the house back either, because there is no equity. Five-ten years ago, the bank didn’t care, because they would simply sell the house and get their money out.
If an individual walks away from a bad investment, I don’t think that makes him a loser.
