Mortgages: Who’s To Blame For The Lending Crisis?
November 19th, 2007
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Jason Vondrak provided us with a view regarding the Fed and risk-based premiums for FHA loans. Fair enough. Allow me to respond to the points which were raised.
Jason says: In response to the “Gimme a break comment” The consumer must also be held accountable for their lack of due diligence. We live in the information age where consumers have all the information they need at their fingertips to make an educated decision based on their current situation.
Peter says: Consumers surely do not have the information available to loan officers or lenders. Consumers are entirely dependent on lenders for information, advice and counsel. By every reasonable measure consumers have an enormous disadvantage.
Jason says: Though drastic, This foreclosure mess is nothing more than a much needed market correction. Too many of these homeowners were chasing winners, and at the same time inflating home values.
Peter says: Huh? Given that lenders are supposed to value properties independently it seems difficult to believe that homeonwers could outsmart lending practices and procedures which worked so well in the past.”
Jason says: Sure, banks were loosening up their underwriting requirements which allowed borrowers to qualify for a home that they otherwise could not have. Banks saw it as a chance to “capitalize” on a market that was flourishing, and they too lost.
Peter says: Nope, not all lenders went for the gold. The little community bank that I use refused to offer option ARMs or to accept stated-income loan applications. They are currently more profitable than any number of major lenders and brokerages.
Jason says: While there are definite dishonest and unethical practices being practiced in the real estate industry, there are unethical practices in every industry. Let us be careful not to pull the integrity blanket over the banking industry as a whole, especially to those banks who practice and continue to practicew/in the legal and ethical framework of the U.S. Constitution.
Peter says: Agreed, sort of. Unfortunately the federal legal system does not say that predatory lending — overcharging borrowers — is a crime.
Jason says: Too many of these homeowners were pursuing the American dream of home-ownership a bit prematurely. Too many times these naive borrowers are bailed out by these heartfelt testimonials when instead they should have done their homework.
Peter says: Gimme a break (again). Do not lenders underwrite loans? Do they not check income, debts and credit? Do they not appraise properties? Do not lenders write loan documents and establish qualification standards?
Jason says: Borrowers “made an investment and they lost. Home ownership is a privilege not a right. While much more emotion is tied up in home ownership than stock ownership, it is still an investment that carries a certain level of risk. We live in a capitalist society and there will be drawbacks as well as benefits to this. While this socialist approach to bailing out greedy and overextended borrowers is discouraging, it is also a much needed balancing measure. Attention all socialists: Stop spending efforts and money pointing fingers at banks and brokerages, and start making efforts to educate borrowers.”
Peter says: Is it socialism when the Fed reduces the discount and federal funds rate to bail out huge banks and lenders? Is it socialism when overcharging a borrower is not a federal crime?
Jason says: “Quit pushing propaganda on the American public that calls for government interference. The real estate market will take its own measures to correct itself. Extreme measures of government intervention will only further damage the real estate economy.”
Peter says: Is not the Fed’s decision to suddenly abandon its worries about inflation to help a few big banks by lowering the discount and federal funds rate a good example of government interference and intervention? How come it’s okay to interfere for the big guys but not the homeowner down the block?
The real question is this: Why didn’t federal regulators put an end to this before it got out of hand, say in 2001, 2002, 2003 and 2004?
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November 19th, 2007 at 9:49 pm
Peter,I agree with you partially, you are an intelligent person. However, consumers do have access to more information than they need. Of course loan officers and banks have more information than consumers. The sky is blue. I am in total aggreeance with you on banks having the obligation to inform their consumers about their products before selling them. Consumer’s are not “entirely” dependent on banks for info. It is also important to note that option arms, while risky, are not necessarily bad for everyone. If used properly they can be an extremely effective cash flow tool. You are right though, many of these arms were pushed onto consumers who were misinformed by their brokers whom were given higher compensation in return.
By the way, that is really great for your “little community bank” and I mean this from a profit standpoint not an ethical one. Let us remember that banks are in business for one reason and one reason only, to make money. Some banks are going to use high risk bank products and some are going to use low risk products, but in the end they are both aiming for the highest profit possible.
Another quick correction referring to your comment on the federal legal system not punishing predatory lending and overcharging borrowers. First off, there was a small company “Ameriquest”, maybe you have heard of them. They were pretty much shoved out by the fed and fined 100′s of millions. Second, the federal government most definitely says overcharging borrowers is a crime, its called section 32, check it out for your records. In response to the “It is socialism when the fed reduces the discount rate to bail out huge banks and lenders.” Now we are getting into economics and this is a separate issue. Lets first address your inadequacies in real estate finance, business ethics, and business law. These are inflationary measures used to offset a recession so that we can compete in the global economy.
The question of the day is “why didn’t federal regulators put an end to this before it got out of hand? I suppose you will side with me on this one. I guess the reason is that when everyone is making money there are no problems and everyone is happy. You can point the finger at Greenspan now because hindsight is 20/20 but I don’t think this will make matters better. I guess had Allen been psychic, he could have foreseen this mess. I strongly believe that had the fed known that such a mess was lurking around the corner, they would have acted accordingly. In order to move the economy forward, we must not dwell on the mistakes of the past but rather learn from them and fix them. Step one is quit pointing fingers and start educating borrowers.