I have been thinking a great deal about the current crisis and today I had a clarifying and frightening thought about the causes of this crisis. Originally I was pissed about the bailout; why should I, a responsible home owner and taxpayer, bail out a bunch of corporate fat cats that practiced predatory lending and gave loans to people that couldn’t pay them back… But today I realized that these loans are probably not the root of the problem, just the last stage in the corruption. The real problem is the people who could afford the loans…
My realization is this (and I am now scared to death): The problem is that a very large number of loans were given to people who had the ability to pay them back but don’t really have any motivation too…
Several years ago my wife and I were sitting pretty with 200k in equity in a 600k house. Most of this equity was derived from trading up in a real estate market that was experienced value growth of about 25% annually. Currently we have probably lost most of that equity and our house is worth only slightly more than our mortgage. Fine, we love our house and make more than enough money to afford our note, but what about the people that had only 5% equity (or even less) when they bought. Why would they continue to pay a loan that is much higher than the current worth of their house. Me, if I had a house worth 400 k and owed 600 k, I would walk away and let the bank foreclose. Of course, this would further drive down the worth of other houses in my neighborhood, but at least I got out while the getting was good. This cycle is self-reinforcing. According to this Economist article, currently ~4.5% of home loans are more than 90 days delinquent. Almost 1/20 for Christ sakes! And this does not even count the houses that have already been foreclosed upon. Are these people that cannot afford their mortgage? Or are these people that can but are not really happy with the fact that they are upside down with their houses and are wanting out? Is there any body on this board that knows the breakdown on what mortgages are being foreclosed upon? How many were fraudulent? How many are due to financial hardship? Finally, how many are due to people walking away from a bad investment?
So who is responsible? I think that people who walk away from their financial obligations are lame, but I am not sure that I really blame them. They made a deal that is no longer in their favor and are now, responsibly, getting out of it. The contract they signed was clear: if they stop paying on their loans, their house will be foreclosed upon and they will have their credit seriously dinged. OK, that sounds better than being 200k upside down in a house that is not going to regain its value for a decade… What about the large financial institutions that are on the verge of being bailed out (Which, BTW, I support. For my own good, not Wall streets; the writing is on the wall and the conditions being faced are similar to those that caused the Great Depression… >25% unemployment, 40% foreclosure rates, no thank you!) , how much blame belongs to them? Obviously, they failed at doing due diligence on the packaged debt they were buying, but should they shoulder the majority of the blame? What about the lend originators? How stupid do you have to be to allow a person to buy a house with NOTHING invested in it? 95-100% financing was common several years ago. With this, if the worth of the property drops at all, it’s not worth it. The investment is bad and any rational person is going to consider walking away. Who allowed this? Where did this start?
Shit, this pisses me off… That, and the debate playing in the background, is getting too worked up to continue. Comments? Discussion?