Well it seems as if this weeks political theater will revolve around the financial industry and the causes of the Great Recession. We will once again be told that the real estate bubble bursting caused the entire house of cards of high finance to come tumbling down. We'll hear about how Goldman Sachs played fast and loose with the facts of their offerings. We'll hear how the SEC regulators spent more time surfing for porn than they spent, well, regulating. But never fear, we will also hear how part (or some, or most) of the blame must go to people who bought houses that they just couldn't afford. To which I say; BS!
The image of poor people running into banks and mortgage brokerage firms pleading for a 100% Jumbo loan to buy a half million dollar McMansion fits just fine with the personal responsibility crowd on the right. They can just see the hidden camera video, produced by the dude who "exposed" ACORN, no doubt, showing a phony poor couple getting a huge loan with a wink and a nod and no job or income to speak of. The problem with this idea is that people really don't act like that.
Look, the Queen of the Frontier and I owned a real estate firm for a while during the late bubble and after it burst so I know what I'm talking about here. The vast majority of real estate transactions involve at least one real estate professional. If you're trying to sell a home which you have listed you don't want to take deadbeats in to see the home. It's a huge waste of time. And time, as we know, is money. In fact, the process of "qualifying" a buyer is part of the training for your license. There are formula for determining whether or not the buyers can afford the house they want to look at. But, of course, the question of what a client can or cannot afford changes when bankers and mortgage brokers solicit real estate agents to bring them borrowers for a new and improved "Mortgage Product."
Because, really. If a banker tells you, as a person who makes a living by earning commissions, that people who meet conditions X, Y and Z can get a huge loan are you not going to direct potential buyers to that bank? And if X, Y and Z don't involve 24 months of pay stubs and a hefty down payment, should you worry that, gee these folks might not be able to keep up their payments? No, what you do is send the clients to the lender and then when they come back and say that they can, in fact, borrow what they need to buy the house you write up the papers and think about spending your commission.
Because, here in the real world, the vast majority of people don't know if they can afford a home or not. They count on certain professionals (bankers) to tell them how much they can afford to borrow. They count on other professionals (appraisers) to tell them how much the house they want to buy, or refinance, is worth. They count on still others (real estate brokers) to put the deal together and they count on lawyers and insurance agents to make things proper. When all of those professionals directly, and indirectly, tell you that yes, you can buy a home, most folks will not then sit down at the closing table and say, "Oh gosh, I don't think I will be able to afford the payments in three years when the interest rate adjusts."
So at the individual level I can see how most buyers, or people who refinanced, didn't have a clue of the problems ahead. But if we look at the bigger picture I think it becomes crystal clear that it wasn't borrowers who caused the crash at all. You don't hear about borrowers being charged with fraud for lying on an loan application but we sure have heard about fraud done by lenders. That to me is the best argument for not blaming borrowers.
Predatory lending was a fact in the real estate bubble. Mortgage brokers, bankers, appraisers and lawyers were all involved. The biggest houses of finance in the world created money by the truckload to pay for it all and we are now discovering that it was all based on the simple lie that real estate prices never go down.
Please don't blame the mess on the little guys. If your banker told you that you were golden for a loan, would you argue with him? Would you really? I didn't think so.