The short answer: Everyone.
Several weeks ago I listened to an episode of “This American Life” while Ira Glass explored every level of the mortgage crisis. First off, the amount of money worldwide that people want to invest has doubled in only a few years, creating more demand for investment products. They seemed to like mortgage-backed securities and lenders scrambled to meet the demands. At the same time, mortgage brokers were (and still are) getting paid 1% origination fees on loans they had no stake in–if the buyer defaulted, it didn’t affect them at all. For brokers, the bigger the loan they could sell, the bigger their cut. Then there were the buyers. The buyers had a variety of problems. They were uneducated about loan products, they didn’t have a realistic view of their budgets and what they could afford, maybe they were simply greedy.
Suze Orman, Michelle Singletary, and probably many more lesser-known personal finance advisors say that one of the most common dangers surrounding debt is a person’s overestimation of their future earnings. People take take out loans or use financing counting on future raises, promotions, or advantageous job changes. They don’t count on layoffs, medical emergencies, or divorce.
We also know that WAMU had appraisers who were overvaluing houses, which led to buyers getting big loans and when they tried to sell, the house would be revalued at an amount less than what they still owed.
A few days ago on “Weekday,” Steve Scher’s guests offered further insight to the breakdown of the mortgage system. Not all states require licensing for brokers. The market boom made mortgage brokering a lucrative business and it attracted lots of new brokers. These brokers weren’t all necessarily greedy, some were just grossly undereducated and working without much oversight, if any. Some didn’t know what they were offering any more than the buyers understood what was being offered to them. Banks couldn’t even keep up with the onslaught of loans. Thousands of mortgage were were signed off on and approved with no review by a loan officer.
So up to this point, you’re probably thinking I am blaming the mortgage crisis on everyone in the lending/real estate industry and the buyers. But it goes even further. I really mean society as a whole. Home ownership is “The American Dream.” Renting is for the young and low-income. Our government gives tax deductions for mortgage interest and real estate taxes. Get-rich-quick schemes and cable TV shows revolve around the wealth to be had in real estate investing and flipping. I know there’s more but that’s all I feel like for tonight, maybe I will add more later.
Yesterday I heard that Countrywide Home Mortgages told people incorrect information about the terms of their loans. If you’ve ever gotten a mortgage before, you know that it’s practically a 2″ stack of papers and I can bet that–no matter how responsible a buyer you think you are–you didn’t read that entire thing. Before all this news about what a mess the industry is, if your broker told you that you were getting a fixed rate loan, would you even fathom that he was lying to you? And that is exactly what they did to some buyers.
I also wanted to to add a little to that “American Dream” concept. I personally bought into that. I seized upon the idea that “paying rent will never build equity.” Well paying closing costs doesn’t build equity either, and the amount of closing costs my ex and I spent on our condo could pay my current rent for two and a half years. Another problem I had was that I am from central Illinois. Out there, a mortgage payment is about the same as rent (without the landlord). It’s totally worth it, and I just applied that way of thinking to Seattle, which is an entirely different market. When we got that condo, I considered myself a pretty financially savvy person: I’ve always had a good credit score, I was putting 10% of my gross income into an IRA when I was 20, at 24 I’d never carried a balance on a credit card, the only debt I’d ever had was $350 to Carle Hospital that my insurance didn’t cover (I could have paid it off faster but I didn’t want to stop putting money in my IRA). What I’m trying to say is that I’d always been smart with money but was still irrationally drawn into homeownership. I can totally understand how people could be swept in by the ideal of owning their own home along with the deception of brokers & appraisers and real estate agents’ assurances that housing would keep appreciating at 20% a year.—added 7/3/08