Tuesday, June 24, 2008

It’s the Banks’ fault, really.

Last year, as the market slowed to a crawl, and everybody began to realize just how bad things were, the finger pointing started.. Banks were making loans to people who couldn't afford to repay them. Borrowers were lying on their loan application. Mortgage Brokers were helping borrowers lie, or were having borrowers apply for loans with artificially low start rates. Realtors were encouraging buyers to buy more expensive homes. Appraisers were justifying rapidly rising prices. The Media was fueling the price frenzy.

Everybody can share in the blame to some degree. Here's my list of blame, in order from least to most at fault.

The Media. Of course they fed the frenzy – these are the same people who devote 15 minutes of a half-hour broadcast to ... rain. I can't wait for the Monsoon '08 series next month.

Appraisers. The appraisers who committed outright fraud should be punished. But the vast majority were really trying to capture the market value – what the buyer and the seller agreed to.

Realtors. Those who encouraged buyers to use "pick a payment" type loans in order to buy a more expensive home than they could afford were either ignorant or negligent.

Mortgage Brokers. Same argument as the Realtors, except they can't claim ignorant. The loan officers who knowingly put borrowers into loans that would adjust upward and become unaffordable shouldn't have a clear conscience today.

Borrowers. Ever heard of buyer beware? You're taking out a multi-hundred thousand dollar loan; don't tell me you didn't understand the terms. At the end of the day, you're responsible for your own actions.

Banks (and Mortgage Lending Companies). When you lend money, you're number one rule is to not lose money. When you lend money professionally, you're at a big advantage, because you have systems in place to make sure every borrower has the desire & ability to repay you, and the collateral in case they don't.

For years banks made loans based on low collateral, or bad credit, or without verifying income. But they always relied heavily on the other two in these cases. No collateral – the borrower better have good income and great credit. No Income – look for a borrower with great credit and some equity in the property. Bad credit – need good income and good equity. Oh, and they'll add a higher interest rate to the loan in all three of these cases.

Suddenly, in 2004 and 2005, banks stopped caring about these qualities. No down payment, no income, no credit – NO PROBLEM! Then they went even further by creating and advertising the low teaser rate loans: "Buy a home today with a $500,000 loan, and your payment can be as low as $200 per month." Are you kidding me?

Remember the old Golden Rule – "He who has the gold makes the rules." The banks had the money; they were the ones making these loans. They might claim they were lied to, and even defrauded. But if you don't bother checking anything before you make a loan, that's what you get. Just like the borrowers, you're ultimately responsible for your own actions.

As a side note, I might have a different opinion if the banks took strong action early in the process. They had every opportunity to be proactive and make radical solutions which would benefit everybody. (I even offered an idea for renegotiating mortgages.) But they didn't. They've handled the entire process by sticking their head in the ground, or by running around like the Keystone Cops. My short sale example from yesterday highlights this point.

Your wouldn't trust the banks with his money if it wasn't FDIC insured Realtor,

Chris Butterworth

[tags] real estate bubble, mortgage lending [/tags]