Much has been said lately about sub-prime mortgages and how they have led to the market collapse…lots of hand-wringing about lending money to people who didn’t deserve credit, political pressure for doing so, etc. While there is a tiny bit truth to that, the big, market wrecking scandals in sub-prime were other issues:
1. Lots of “Investors” used sub-prime “no documentation loans” to buy up extra properties. Many claimed them to be personal residences, even though they lived and worked out of state, and Lenders and Builders winked at it. They either held them for short term speculative profit and re-sold them, or put renters into the houses, and in many cases, just pocketed the rent money, never even making a payment on the house. When the homes eventually reached foreclosure, or entire neighborhoods became rental communities, the prices in those neighborhoods declined and took lots the honest folks with them. People couldn’t move because they couldn’t sell their homes, which were worth less than they owed. Fortunately, San Antonio has not fared badly, (we are still seeing normal price appreciation), but many markets totally collapsed.
2. Many unscrupulous Lenders pushed Buyers into sub-prime loans, when they would have qualified for regular FHA or Conventional loans at less cost. They did so because their own commissions and yield were higher. REALTORS® (in Texas and most other states) have a fiduciary duty to our clients, that is, we have to use our professional knowledge and experience and place our clients’ interests ahead of our own. But Lenders have no such duty. Their relationship is solely a Vendor. If the Real Estate agent doesn’t know (or care) enough about lending to catch the higher cost arrangement, it goes forward. Caveat Emptor still applies.
All this came about when lenders discovered that they could bundle loans into packages, presumably sorted by risk, and sell them at a huge profit as “securitized debt instruments”. Once sold, they were no longer obligations of the lender, no longer on the balance sheets, and so the lender could lend that money over and over again without any new reserves. The best discussion I have found of this topic is here:
http://www.bloomberg.com/apps/news?pid=20601109&sid=a0jln3.CSS6c&refer=home
So, when you hear on the news that “inept poor people who shouldn’t be allowed to buy homes but were allowed to do so by greedy politicians, caused all this grief”, keep in mind that, as frequently happens, the problems originated in the ivory towers of finance, staffed by hundreds of Blue-chip school MBA’s and Lawyers, pushed onward by the best of highly paid Consultants, with networked banks of the most powerful computers, in an effort to find new and innovative ways to game the system.
Most of our “poor” first-time home buyers who barely qualified to buy their dream home are valiantly making their payments and building a better future for themselves and their kids. They make their living doing actual work (many have two or more jobs), not manipulating pieces of paper. None of them know what a credit-default swap is (outlawed in the last century because it contributed to the market crashes of the early 20th century), they never heard of CDOs, they don’t understand the wide price swings in gasoline that have nothing to do with their driving habits. The blame goes not to them, but to the best educated, best paid, and most “respectable” among our society. “To whom much is given, much will be required”. Luke 12:48.
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