Blog Bonus Submission: Share the Problem and the Blame

Blog Bonus Submission
Share the Problem and the Blame

Turn on the news or radio, open up a newspaper or magazine or simply talk with friends’ family and co-workers and the state of our nations economy will be discussed, dissected and judged. At the very heart of our financial woes lies the mortgage crisis and ever-increasing foreclosure rates, as we see more and more people removed from their homes and forced to find alternative living situations. Most of us are quick to blame big business and banks for their greed and investors and regulators for their lack of foresight and discipline, yet who’s really to blame for this financial blunder that is bringing our nation to its knees?

To understand the problem, it requires a look into the past to see where we began and the reasons behind those decisions. Since the Great Depression, federal regulation has changed the mortgage lending industry in an effort to create equality and uniformity in the lending process. Generally speaking, the government prefers people to own homes rather then rent since this provides many benefits to both the homeowner as well as our governing bodies. One such effort was the 1977 Community Reinvestment Act (CRA) which attempted to provide home loans to low-income individuals and families who did not meet the credit or financial criteria. Many feel that this was an effort to help minorities and other segments of our population who had been historically denied the same opportunities as others. While the debate on whether the CRA was created by left-winged lobbyists or provided needed opportunities sparks interesting conversation, that fight will have to wait for another day. This act laid the foundation for companies to provide sub-prime mortgages to borrowers who did not meet their high standards, allowing businesses to loan money to riskier individuals. In the nineties, banks began to see more and more pressure to extend these loans even further and the standards they had previously set began to slide lower and lower. According to Thomas J. DiLorenzo, a professor of economics at Loyola College in Maryland and author, banks have been pressured, coerced and forced into lending billions in the sub-prime market, bringing risk and bad assets to their company and the industry.

Wikipedia reports that as of March 2007, the subprime mortgages value was an estimated $1.3 trillion making up between 18%-21% of the total originations between 2004 and 2006. This number jumped from less than 10% in 2001 to 2003; while these subprime loans would comprise almost half of the total foreclosures of 2007 and roughly 16% of subprime adjustable rate mortgages were either 90 days past due or were already in the foreclosure process. At the same time we hear stories of a single woman on disability purchasing a home worth $300,000 or a family making less than $35,000 a year refinancing their home for $400,000 and getting $100,000 cash out. We wonder how lenders could be so blind and find it impossible to understand why investors are putting billions of dollars into these terrible loans. To understand how these kinds of things are happening, I spoke with a friend who is currently going through foreclosure and will soon lose his house.

His name is Matt, he is 26 years old, single and purchased a home in Arlington in 2003 for $225,000. When he was approved for the loan, he and I were roommates and two of our friends, who were also roommates, decided it would be a great idea for us to find a house to rent, rather then live in apartments. At some point, Matt decided he could buy a home and we could pay him rent, thereby offering him a return on his investment. He called various banks mortgage lenders, including Countrywide Home Loans, Wells Fargo and First Option Mortgage and was promptly denied by all three since his credit was in the mid 500’s and his debt to income ratio was staggering. Even their subprime mortgage department turned him down as his numbers didn’t fall into even their low guidelines. He then went to an individual mortgage broker who told him it wasn’t a problem and he would get him approved, which he did. Matt got the money, got the home and the four of us moved in to his beautiful home soon after.

Five years later, Matt continues to work his job waiting tables and working valet on the weekends in Dallas, but the rest of us have moved on and moved out. He has other roommates from time to time, but more often than not he’s not getting the income that he needs to pay his mortgage. We looked over his original loan paperwork and discovered that not only had the broker changed Matt’s credit score, but he changed his job, his income and financed the property as a rental with the Matt actually making money from the people he was supposedly renting to. The broker did the deal, charged a $7,500 brokerage fee on top of the $2,500 in other fees added into the loan and promptly sold the loan to Countrywide.

Countrywide, one of the original companies that denied Matt, now owned the servicing rights to the loan, but had sold the actual loan via mortgage backed securities through Fannie Mae. Not only did the broker make a killing on the loan, but he set it up as a one year interest-only ARM loan, despite assuring Matt that it was a 30 year fixed, principle and interest payment loan. Rates steadily increased from 2003 to 2008 and every year Matt saw his interest only payment go up and up, while his balance remained the same. Since then, the broker has closed up shop and is nowhere to be found.

I see two major issues that the majority of us fail to realize and the media fails to mention in their analysis and judgment of the situation: there were a lot of small brokers, firms, title companies and appraisers that plaid a key role in the lending of subprime mortgages and individuals should also be responsible for their actions, in spite of the underhanded dealings of banks and brokers. In the end, many of the people who are in foreclosure or are behind on their payments never should have purchased or refinanced their home to get cash out because they were unable to afford doing so. Just because a bank is willing to give you money, doesn’t mean you should take it; each of us is responsible for what we do. If they bank or broker was dishonest, you still enjoy a three day right of rescission on your primary residence, three days to comb the paperwork to make sure everything is in order and correct. If you are unable to do so or don’t want to take the time, hire an attorney to do it for you. How many people who were misled would have paid a few hundred dollars to an attorney if they could have prevented the situation they are in?

My point is simple, yes banks made bad loans, yes the government failed to regulate properly, but how many times can we blame others for our mistakes? Many people are in terrible situations and have lost most, if not everything and I truly feel sorry for them. I’m sure it was a very hard lesson to learn, but hopefully we will all realize that we have to be responsible and make sure that our own business is in order when it comes to our finances.

Kenneth M Sturgill

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
http://www.lewrockwell.com/dilorenzo/dilorenzo125.html