The Mortgage Crisis – Was it the Borrowers’ Fault?
The mortgage crisis has caused enough finger-pointing to last most of us a lifetime. But despite it all, there is no one “culprit” that can be blamed for everything that happened.
Some blame the loan originators, some the appraisers, some the Real estate agents, some the government, some the banks. Others blame the homebuyers – saying that people shouldn’t have purchased homes knowing that they couldn’t pay the payments.
I for one don’t think most of them did know that. The first and most obvious reason is that many have lost their homes in the last 2 years due to the state of the economy. When you lose your job and can’t find another it’s pretty difficult to keep on paying the bills. Those consumers had no intention of being unemployed, but it happened.
For others, the inability to make payments was the result of death, illness, or divorce. None of those are events we plan for.
But what about all those sub-prime borrowers who got in on “teaser” interest rates and were unable to pay after their ARM’s reset?
Their critics point the finger and say they should have known better.
What those critics fail to consider is that there are millions of unsophisticated, gullible people who sometimes trust the wrong people or entities.
When the government decided that everyone should be able to own a home, they instituted programs that were designed to fail from the first. Fannie and Freddie were major players in pushing these programs to the very people who were least able to understand the long-term ramifications or the inherent risks.
I heard the pitches that some mortgage lenders used back then. They went something like this:
“Apply for this loan now at only 1.99% and your low payment will let you qualify easily under the debt to income ratios. At the end of 3 years the interest will increase but you don’t need to worry about that at all.”
“When you make all your payments on time your credit scores will improve, so you’ll easily qualify for a 6.5% rate by then. On top of that, you’ll be getting raises at work over the next 3 years. So all you’ll have to do is refinance before the adjustable rate resets. With your increased income and improved credit scores, that will be a piece of cake.”
What many of those lenders didn’t bother to tell those borrowers was that the interest they weren’t paying each month would be added to their loan balance – making their refinance amount higher than the original purchase price. And we don’t know, but can guess that many of them didn’t explain that the payment would double or even triple when their rate reset.
And of course, none of them considered the possibility that home values would drop – making it impossible to refinance their loans. After all, prices were going up.
Should they have read the fine print in their loans before they signed? Of course they should have. But with the terms buried in the legalese, how many would have understood what they read? Even experts sometimes have a hard time deciphering some of those documents.
So instead of trying to read and understand what they were signing, they placed their trust in “the experts.” And they trusted their government when the word was “You deserve to own your own home. It will be fine. You can do this. You should do this.”
Sophisticated borrowers knew the risks they were taking with an adjustable rate mortgage and some of them lost. But what about all those others who didn’t understand.
Is the mortgage crisis their fault?