I continue to be amazed at how many people still believe that the large number of foreclosures are caused by irresponsible homeowners, who have chosen to walk away from their homes - their investment.
But then, define irresponsibility. If an individual makes a poor investment, is he morally obliged to continue to support that investment regardless of how the investment performs?
The prospective homeowner enters into a contract that is designed by the lender and is acceptable to the lender. The lender who has superior knowledge and resources, knowingly enters into a contract that is certainly skewed towards the lender.
Most loan agreements state the that the borrower agrees to make monthly payments until the loan is paid off in full, and if the borrower fails to do so the lender can take possession of the home in order to satisfy the debt.
If the investment is no longer a viable investment to the homeowner, why would the homeowner be expected to uphold that agreement? He has a choice. Up hold the agreement or let the lender take the collateral and sell it.
Let’s not forget the sophistication and resources that the lenders have at their disposal. Undoubtedly far superior to that of the homeowner. With lender’s knowledge of the market and their superior ability to check out the potential borrower, they agreed to make the loan with near certainty they will profit.
And then there’s the bigger picture...
Before wall Street got into the mix, most lenders would vet the prospective borrow to ascertain their credit worthiness. Often requiring a good amount as a down payment, along with verification of employment, income etc.
With the securitization of mortgages and a readily waiting if not feverishly hungary, market to buy these bundled and securitized loans, lenders no longer had to worry about collecting the monthly payment over a number of years.
They simply created the loan, and sold it to Wall Street at a profit - sometimes retaining the management of that loan, for a nominal fee. They got their investment back almost immediately, enabling them to reinvest.
That created a need to create more loans to sell. If you have ready and willing buyers clamoring to buy the loans you create there;s a huge incentive to create more loans. The more the merrier. What better way to create more loans, than to reduce the requirements necessary to qualify for those loans. The lender risk to the lender is practically non-existent, since the loans were sold almost immediately after their inception. They really didn’t care if the loans performed or not. They got their money back days or hours after the closing.
Wall Street really didn’t care either, because they had invested in a bundle of mortgages, and if a few of those mortgages defaulted, it wasn’t going to impact the overall value of the whole.
No documentation, no verification, adjustable rate, zero down etc loans, were created to attract new buyers. Creating the opportunity to write more loans, that could be bundled and sold to Wall Street.
And it became almost irresponsible to leave equity in your home. With all that money sitting there ready to be pulled out and reinvested. If I recall, the public was inundated with marketing exhorting the benefits of pulling that equity out to reinvest, buy a new car, new furniture, take a trip etc.
Of course, a side effect of this is, with more buyers there was higher demand. Higher demand drove market values of homes up, which benefitted not only the lenders but homeowners, local governments and everybody in the “food chain.”
These increased market values were unsustainable, as any sophisticated economic model would have shown. Hm,...? And who had access to those sophisticated economic models? The very people with a huge incentive to drive those market values up.
Another aspect of this mess that tends to be overlooked, is many homeowner’s income changed or were lost altogether, making it difficult if not impossible to continue making payments on their home loan.
And, lenders were not willing to negotiate with borrowers and still are not. Their perspective was and often still is, “Hey you signed the loan documents - it sucks to be you.”
Had lenders simply reduced the interest rate, they could have maintained the principal, added the arrearage to the backend of the loan and the loan would have been restored to a performing asset, and the homeowner would not have been foreclosed on.
However, financially, it made more sense to foreclose. Often the lender would be reimbursed up to 80% of the loan, if not more. Now if they took the home back, all they had to do is sell it for at least 20% of the loan amount, plus some costs and they were golden.
Even when home values were reduced, it wasn’t going to be too hard to sell a $100,000 home for less than $50,000
Also remember, many of the lenders had received all their money back plus a profit, when they sold the loan to Wall Street. Now they were getting paid to manage the loan, and often they made more profit by completing the foreclosure process.
Oh, did you know that some of the lenders used the bailout money to actually buy foreclosed homes and resell them at a profit.
Yes, we all know there were some homeowners who took advantage of the market and walked away from homes even when they could afford to pay the mortgage.
They were the minority. The folks that were wielding the power and recklessly manipulating the market to their benefit were the lenders.
A great example of this is the robo signing and the creations of MERS. The use of MERS totally side stepped the entire chain of title, creating murky ownership and defrauding local communities of transfer taxes. And robo signing - talk about identity theft!
This whole mess is riddled with fraud perpetrated by the vary lender’s that our politicians and tax money bailed out.
The idea that lenders are professionals who above reproach is a myth perpetuated by the lending industry itself, and they have our “leaders,” our political representatives in their back pocket because of their financial clout, and ability to contribute heavily to election campaigns.
