Lender's Created the Real Estate Bubble!

Give me a Break!  Lender’s Created this Mess, not the Consumer!

Lender’s created the real estate bubble by making loans available to just about anybody who wanted one. 

What’s this I hear?  Homeowners who are losing their homes are responsible for the depreciation for their neighbor’s homes!

Say what?!

Let’s step back a bit and take a look at how those home values got there in the first place.

We all know the basics of supply and demand - the higher the demand, the higher the value based on the amount of supply.  If supply and demand are reasonably equal, then values remain reasonable.  

But what happens if there’s low demand or an over supply?  Values drop, right?

And the opposite occurs when demand is high and supply is low.  The more people who want something, the higher the value because the product will go to the person who is willing to pay the most.

Ten years ago property values were being driven up, simply due to multiple offers coming in.  There for awhile, if you wanted to buy a home, often you had to submit an offer that was higher than the asking price.

To follow your father’s advice, and write an offer that was 10% below the asking price was simply a waste of a Realtor’s time - and she was willing to tell you that, point blank.  “In this market, 10% below - really...?”

Now take a look at real estate from a lender’s point of view.  First of all, a lender’s job is to make money selling “money.”  Right?

They make money by collecting fees, collecting interest on loans they make and by selling those loans to investors.

The more often they can do this, the more money they make.  But they have to have borrowers to “sell” their money to.  So, they marketed aggressively for borrowers.

Anybody remember those no down payment, low interest ads or how about no doc loans?  Or those loans offering up to 110-120% of the market value of the home?!  Do you think these loans were based on sound, financial principals?

If I loan you $50 bucks with a simple interest of 10%, and you pay me $55 bucks in a month, then I’ve done OK.  But, if I loan you $50 bucks with the same simple interest, and you pay me back in a week, I have done much better.  

Because now I can loan that same $50 at 10% simple interest, to your buddy the next week, and again the following week and one more time the week after that, within that same month long period, collecting $5 per week for a total of 4 weeks, and $20!

Instead of making $5.00 or 10% over the course of the month, I have made a whopping $20.00 or 40%.  The same amount of money loaned, the same interest rate and the same time frame, but a 40% return because I was able to loan that money 4 times instead of once. That’s a much better return on investment.

This is why the banks bundle loans a form of securitization and sell them to investors.  Of course, they’re making money when they loan the money to borrowers, but they’re also able to take their money back and re-loan it, collecting another round of “fees.”

Obviously, it’s more complicated than that; the point is the more often they were able to loan their money or “turned” their money, the more they made.  To facilitate this process they needed a constant source of investors, to buy these loans and replenish their investment funds.

If you have guaranteed investors lined up to buy the loans, then it becomes a no brainer.  Simply fill the funnel.  Who cares if the borrowers are qualified, if you’re just going to sell the loans at a profit to investors anyway?

To insure a constant source of borrowers, they simply created new and easier loans, dropped their requirements and stopped doing their due diligence.  By doing that they enticed more borrowers into the market, which in turn created demand and drove home values up - along with other consumables.

Driving prices up, helped the banks too, as well as the entire economy and it became a self-perpetuating, cash generating machine.  As home values went up, so did the amounts of the loans.  The increased home values also fueled home equity loans, refinances, etc - all designed to "pull" money out of the home's appreciating value.

As home values increased, so did the size of the loans and the fees collected.

And, of course, the larger mortgages, caused the banks to collect more interest.  This in turn made the loans more valuable to the investors buying the bundled loans.  As long as the economy was cooking along, the momentum of this cash producing machine continued to build. 

There’s just no way lenders, with all their resources and sophisticated economic models didn’t see how they could essentially, manipulate the market by making money or loans available to every potential buyer out there, regardless of their ability to repay.

As for the consumers - they took advantage of the opportunity that was made available to them by the lenders.  I mean, let’s get real here.  If the lender’s would have done their due diligence, they would have discovered that a lot of the borrowers requesting loans, didn’t have the ability to repay those loans.

The point I’m trying to make is these lenders were not innocent bystanders who got taken advantage of by greedy consumers.  These lenders actively pursued, marketed to and approved loans to consumers who truly did not qualify.  

Not only that, but through their marketing they convinced consumers that leveraging their credit capability was away to move themselves and their family up the economic food chain.  And that not leveraging ones credit was foolish.

Through their business practices, lenders themselves, knowingly facilitated the artificial appreciation of real estate.

The consumer on the other hand, may have known it was too good to be true, but I doubt really understood the potential fallout of the situation.

The lenders were the parents and the borrowers were their kids.  The kids may have gotten into trouble, but who failed to educate their children properly?  The parents!