The Housing Mess (Are Borrowers To Blame?)

The housing crisis of 2008 and 2009 caught many people off guard and started a downward cycle, affecting every segment of the economy in a negative way. There was much finger pointing, casting of blame from the president, the congress, banks and mortgage companies, brokerage houses, on down to small lenders, realtors, loan officers, appraisers, escrow companies and even down to the borrowers.

On Main Street, many lenders, loan officers, realtors, appraisers, escrow, and title companies realized that they could make huge amounts of money underwriting and selling those types of risky loan products and they went for it with total disregard to ethics and, in many cases, the law.

Were those borrowers who took on such loans just as responsible for their plight? Sure they were. They saw an opportunity for financial gain, and when people are given an unchallenged opportunity to make money, no matter how risky the deal, they will blindly follow the crowd.

It was made far too easy to get caught up in a bad situation. They were offered "stated income loans" in which all the borrower had to do was say they made enough money to qualify. In many cases, there were no employment or credit verifications.

There were even 110-120% loans in which the lender gave the borrower a second loan on the property as his down payment, meaning the borrower didn't need to bring in any money whatsoever to purchase the home. Sometimes, the borrower didn't even have to pay closing costs or escrow fees. In essence, he was paid to purchase the property.

And then there were the adjustable rate mortgages. The borrower was enticed to accept a mortgage because of the low monthly payment at the beginning of the loan period. But after 6 months to a year, the payment started going up and sometimes almost doubled in a matter of a year or two.

During those years of uncontrolled lending practices, many people saw the opportunity for making unearned money in rising real estate prices. You started hearing words such as "flipping" and "equity buildup." Many people who really couldn't afford large mortgages jumped head first into the fray thinking that there was no end in sight to the booming housing market. They were wrong.

They didn't consider the fact that the economy goes in cycles. One day the real estate balloon would surely burst and home prices would suddenly fall. It happened, and when things got ugly, many people simply walked away from their homes, not because they wanted to, but because they were never in a real position to survive if the economy went bad or when their payments went up due to their adjustable mortgages.

Actually, there were many people who made out pretty good during this time but there were others who got trapped in the mortgage mess. They didn't understand the dynamics of what was about to happen and they couldn't see that the bubble was about to burst. This is why there are so many homes going into foreclosure and why so many people, as well as companies, who are filing bankruptcy.

About the author

John M. Roberts is the owner of John Roberts Realty located in Long Beach, California. You may contact him at jrobertsrealty@yahoo.com.

Finance Topic of the Month: Bank Failures