Who’s To Blame For The Subprime Mortgage Mess

by Silicon Valley Blogger on 2008-03-0439

“I’ve seen the enemy and the enemy is us.”

I’ve been following the subprime mortgage debacle for a while now, giving it a lot of coverage. This bust has left us with some tragic results, as homeowners far and wide are left holding the bag and in ruins, after losing their homes and whatever else they’ve got.

It’s common knowledge how much fraud has become a big part of this crisis, but in their own defense, insiders from the real estate industry have claimed that this crime is actually victimless. Is that so? Well you know what mainstream articles on this subject would like to have you think, since they’ve done a good job with putting a face on this crisis, profiling the many who have fallen victim to the trend.

Israel Medina admits he got too gung ho about the idea of getting rich by flipping Bay Area real estate.

Medina, a Concord resident who ran a limousine company before wading neck-deep into the housing market, has seen not one, but 11, of his Northern California properties move into foreclosure in the past year, he said.

“I was a real estate tycoon; I had everything,” said Medina. “Now I have nothing.”

There are many participants caught in this sordid financial drama but it seems that we’ve already made up our mind about who’s really at fault here.

The Accused

So who or what’s to blame for all this?

  • The slimy real estate agent? These are the guys who give you cold calls and bug you to no end with the promise that you can buy houses without having to give up a single cent.
  • The sleazy lender? They’re in cahoots with the agents, approving your loans in the blink of an eye.
  • The big banks? Greedy capitalists (or so they say) who invested in a secondary, unregulated market based on loose and risky credit. That market is now shot.
  • The Fed? The catch-all of blame for all things that have gone wrong with our economy, our system, etc. A favorite target for criticism from dismayed victims of foreclosure and loss.
  • The developers? Hey we wouldn’t be in this mess if they didn’t build so many houses!

I’m sure you can tell (at least I hope) that my tone here is somewhat tongue-in-cheek. In reality, there’s not one element here that is solely to blame; what we’ve got is a cornucopia of reasons and factors and a clustering of events that have come together to conjure this disaster.


And one thing we shouldn’t leave out: the personal responsibility that homeowners have to take as participants in this predicament. It doesn’t help that victims themselves have made it easy for the bad guys to prey upon them, as evidenced by the following survey results.

Check out the results of this homeowner survey done by Bankrate, where people were asked several questions pertaining to their mortgage:

what type of mortgage do you have       arm loan readjustment

worry about affording payments       buying a house

Some Quick Facts

  • According to The Economist, almost 7% of mortgage holders have negative equity. They own homes that cost more to own than rent, but which would not be feasible to unload due to even larger costs.
  • 1/3 of new subprime mortgages are expected to default.
  • 34% of homeowners don’t know what type of mortgage they’re carrying. This has been attributed to the availability of more complicated mortgage products offered by unregulated lenders.
  • 34% of adjustable rate mortgage (ARM) holders don’t know what they’d do once interest rates adjust. [I've been told by friends who are ARM holders that they're prepared to sell their houses if they're forced to. What they don't realize is how tough it would be to sell in a declining market.]
  • 24% answered that they no longer plan to have the loan once it readjusts. [Would that mean bailing out?]

What this clearly states is that we need to do more to protect our money from ourselves. You’re bound to commit financial suicide with this combo: GREED, ENVY (yah, everyone and their uncle’s got a new house, now what about you?), IGNORANCE. We won’t stand a chance against pushy salespeople if we’re acting greedy or dumb.

Some Quick Advice

  • Don’t buy if you don’t have the money.
  • Don’t buy and don’t invest if you don’t understand the terms.
  • Factor in all current and future housing costs before making a decision. Insurance and taxes can rise quite a bit every year.
  • Get home-buying counseling and advice, do a lot of research and build up your knowledge prior to any purchase.

So look before you leap. Before buying a property and signing on that dotted line, make sure you know what you’re getting yourself into, how much you’re going to be “in it” for, and realize that you’re committing a huge chunk of your future into this transaction. It’s shocking that so many people would be putting their life’s savings at stake without fully understanding the details of their financial transactions.

Copyright © 2008 The Digerati Life. All Rights Reserved.

{ 29 comments… read them below or add one }

Andy March 4, 2008 at 8:02 am

Great post and some sobering information. The subprime mess has a way to go still.

Debt Free Revolution March 4, 2008 at 9:09 am

Excellent advice, and also a pretty good autopsy on this mess. I agree with the first comment: this will get worse.

ericabiz March 4, 2008 at 10:40 am

Hi!

Also, I recently wrote a blog post regarding renting vs. homeownership here in the Bay Area. If you rent instead of own a house here, and invest the difference every month, you end up with $1M liquid after 20 years and $3M after 30. It has been an extremely popular, if controversial, post:

http://www.erica.biz/2008/the-real-american-dream-hint-its-not-owning-a-house/

I’d be interested to hear what you think since you’re also a female living here in the Valley. :)

-Erica

Jeremy March 4, 2008 at 11:36 am

This is a balanced examination of the situation, and I know a lot of people are quick to blame the lenders and their shady mortgage products. While some of that may be true, what is often overlooked is that a large number of current foreclosures aren’t even from subprime borrowers or even those in ARMs. According to The Center for Responsible Lending, as of November, 2007, subprime loans only accounted for 14% of all outstanding home loans. That is a very small amount. It is more than in years past, yes, but still a very small slice of the mortgage pie.

In addition, as of the 12-months leading up to June 30, 2007, subprime loans only accounted for 64% of all foreclosures. That means 36% of foreclosures are coming from people with good credit, documented income, etc.

So it is easy to say that all of this simply has to do with lenders tricking people into loans they couldn’t afford, clearly with subprime only accounting for 14% of all loans and 64% of all foreclosures, there are a lot of prime borrowers who either speculated and lost, or simply stretched themselves too thin so that when the pay increases stop coming, or other life events get in the way, they are finding it hard to keep up with the mortgage payments.

New Homes Section March 4, 2008 at 12:27 pm

This is an amazing article with a great breakdown of all the different groups that hold blame. It’s true, it is everyones fault. A lot of this could have been regulated by having stiffer lending laws or not issuing so many building permits. Everyone got greedy including the cities hoping to get taxes from new residents each month/year. Simply put, educating consumers is the only way to avoid this in the future. We can’t get mad at industries trying to meet our demands and looking to make a profit. However, we can neglect to help them out if they try the same tactics next decade.

The Digerati Spouse March 4, 2008 at 6:19 pm

There is a lot of homeowner fraud as well. People overstated their income to get the house, then they did a bunch of cash-out refis during the bubble. Nobody cared because the fees were rich and easy money was everywhere.

When the market collapses, the bank is the one left holding the bag, not the borrower, so we shouldn’t feel too sorry for such folk. They enjoyed their plasma TVs and Hummers while the going was good.

Fiscal Musings March 4, 2008 at 7:35 pm

I want to stress the part about borrowers not understanding the terms. The terms are what you’re left with after the buying process is over. You’ve got to know what you’re getting yourself into for the next 15 to 30 years or longer.

RacerX March 4, 2008 at 7:50 pm

Brilliant post!!! 5 Stars.

We can point all the fingers we want out, but part of the problem is always attached to the pointing finger ;)

MossySF March 4, 2008 at 8:33 pm

It’s also the renters and savers fault for not continuing to throw money into housing to prop up the bubble.

MoneyNing March 4, 2008 at 9:56 pm

If you are one of the people that got yourself a bad loan, you only have yourself to blame. Otherwise, you can probably blame the loan issuers for not checking for payment “affordability” correctly.

The Financial Blogger March 5, 2008 at 3:28 am

I think that people who got in this situation have a big part of the blame.

If banks lent money, it was because there was a need and competition (They though: somebody is going to lend them money if I don’t do it).

Real estate agents are definitely not my favorite people but they are doing their job. And their job is to sell house.

Developers? Hey, if you could sell 1,000 houses in your year instead of 250, would you do it?

The key point here is the population. If they don’t ask for something, it will not happen. No companies have interest in selling a product or offering a service that nobody wants. It all starts from people needs (and stupidity!)

Working Dollar March 5, 2008 at 9:03 am

Excellent article, I agree 100%, ignorance is bliss, or in this case ignorance is deadly. Great post!

Veteran Military Wife at Life Lessons of a Military Wife March 6, 2008 at 5:32 am

Okay, now what about this current talk of “forgiving” part of the principal for those who are in trouble?

http://www.investors.com/editorial/IBDArticles.asp?artsec=5&issue=20080304

Why can’t the banks just refinance for these folks? Wouldn’t it be in their best interest to figure something out? Too bad the homeowner has to owe more in such a case…but they have to take at least some of the responsibility here! I heard a talkshow yesterday where a guy was at the closing table and was given some mumbo jumbo, different from the good faith estimate…knew it was shady…and still signed! I don’t care that he already moved his stuff in the house (dumb to begin with). When will Americans finally take responsibility for themselves for anything and when will we stop expecting hand outs from our govt?

Frank March 6, 2008 at 6:57 am

Great Post. I have been following this at the Congressional level for months now. The blame has been tossed around to all involved with mortgage lending. One that I saw was left out of this post is the securitizers and credit rating agencies.

Quickly, I will explain. Securitizers package these loans into bonds and sell them to you, the investor. The credit rating agency then proceeded to give these bonds AAA Ratings (The highest) even know they included subprime loans (they have recently had to downgrade, which causes even more problems). This provided capital to create more of these loans and encouraged many to sell them to investors, where the problem snowballed into where we are today.

I agree the blame is placed on all parties involved, but let’s not leave out some of them!

Bob March 6, 2008 at 7:16 am

This really wasn’t something that would have been easy to regulate. Every loan product out there was created because it really was a good fit for someone. The problem was when a niche product was offered to the non-niche borrower. Ultimately, when I teach a homebuyer’s class for my non-profit, I tell people that it’s their loan, their debt, their house, their finances, their responsibility. Very few people who go through our classes come back later for foreclosure prevention counseling (and when they do, it’s due to job loss or something similar). There are a lot of shady lenders, but if you don’t understand something, you shouldn’t sign it.

Allan March 7, 2008 at 1:01 am

Do you see this spilling over into other markets? It will be interesting to see what happens with consumer unsecured debt.

Staci Carsten March 7, 2008 at 10:08 am

A refreshingly balanced perspective for a change! Having been in the business a long time as well as having owned several properties over the past several years, I have certainly met many “bad” real estate agents, horrible loan officers, dumb-as-a-post builders and worse. But that doesn’t excuse people from buying something they can’t afford just because a bank is willing to loan them the money to do it.

Jenn March 10, 2008 at 9:36 am

There are many, many hardworking people in this country that bought homes the right way – saving for down payments, buying only what they could afford, researching their housing and loan options. Although these families did everything right, they have become victims of the subprime morgtage mess. Many of these families (mine included) have seen the value of their property drop dramatically while at the same time the houses in their neighborhoods are sprouting “for sale” signs like dandelions and, in many cases, being abandoned. We had planned to stay in our neighborhood for a certain amount of time and then move closer to friends and family, but for now we are essentially stuck here. It’s a very frustrating situation for any homeowner, not just the ones who were lured into subprime loans.

Marcus McCray March 10, 2008 at 3:01 pm

You hit the nail right on th head. One thing that has also been overlooked is the government pushing for lenders to make more loans in the past to help the sale of mortgage backed securities. A bad idea mixing the two if you ask me.

janine fleming March 17, 2008 at 11:36 am

Please do not forget to blame Equifax for their part in this mess. I think they are the number 1 contributor to the subrime fallout. Equifax deliberatly reports a low score on credit reports. They also periodically report wrong information. Or worse false information.
When trying to correct information they do not even have the staff to look into your claim; it is just sent to a company in the Phillipines where it is given a code and entered into a computer data base. Search youtube for equifax. The banks pay Equifax for your score; if it’s low the banks get more interest from the consumer. Equifax has no incentive to raise your score and every reason to keep it low. Low scores equal big money for banks. Also once you are in a mortgage mess and start using credit to pay bills, your score goes even lower because you’ve gone over 50% of your available credit. It’s such a crime that the big brother that controls our economic lives is in bed with the banks, and the Federal Trade Commission does nothing to protect us. I think the big scheme was to get the consumer to have low scores, buy bad mortgages, pay high interest fees and penalties, default, so that the rich investors buy the defaulted real estate for next to nothing and then rent it back to the new generation of poor whose credit is now going to suck for the next 12 years. Please read about Equifax on the consumer affairs website.

-Ed: interesting thoughts, need confirmation!

Akshay July 1, 2008 at 12:28 am

The subprime mortgage crisis is threatening to put the U.S. economy into a recession. This primer it tracks how the subprime crisis unfolded, affecting first the real estate market and now the economy overall. But, this problem would be sorted out soon.

California Mortgage July 6, 2008 at 8:28 pm

You know I hear it all the time from everyone I work with, the worst is still yet to come. I see that it could remain constant and maybe even improve a little but there has to be some concern with the Buy and Bail situation being put to rest. How may homebuyers are there left?

Short Refinace July 6, 2008 at 8:30 pm

Handling your financial picture heading into trouble will go a long way to helping you in the end! There are far too many people who put their head in the sand and hope things turn out for the best. Worst yet, they give up without a sufficient fight! If you need help, get out there and find help!

JP July 7, 2008 at 8:33 am

The main problem with the sub prime fall out is all the debt was slice and diced with good debt. This debt was sold off and people bid the price up all the while asking for more of the same. Banks where paying for debt they could no longer sell and it all came tumbling down. Reminds me of the auctions they use to run on Oxford st in London. People bidding on a box of goods not knowing what was in side, suckers.

WebGuy November 25, 2008 at 4:21 am

Despite the fact that someone is to blame, average citizens should be informed on how to stick up to the banks and fight for their rights, not only just comment on how bad things have gotten.

bruce March 22, 2009 at 12:17 pm

Why don’t you lay the blame where it belongs right at the feet of the democrats starting with jimmy carter, the clintonites, janet reno and the democommies on the banking committee. You know the guys like dodd, barny ***, president buckwheat and all the dems who covered up this thievery than sprang it on us just before the election. Of course they blame bush, and those of you who believe their propaganda, i have a nice sub-prime bridge for you.

Nick July 13, 2009 at 10:04 am

There are many different people that could be blamed. But finger pointing doesn’t fix anything. A part that no one mentions is the buyers (homeowners) themselves. How many of them purchased homes to keep up with the Joneses or have the big house of their friends knowing that they couldn’t afford it. Sure, the lenders should have said nope no way we’re giving you a loan. But, when do people need to start taking responsibility for their own actions?

DENNIS JACONETTA October 30, 2010 at 5:30 am

Who was the idiot who first came up with the idea to lend people money they could not pay back?

Silicon Valley Blogger October 30, 2010 at 7:40 am

Unfortunately, I think that “idiot” knew exactly what he/she was doing. The purpose of creating loan products is to ensure lifelong indebtedness to a company so that they profit from the debtor’s activities. They want you to keep paying up. That’s how they make money!

There’s been a lot of fraud in this area though. So that’s where we should have accountability!

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