It has been over 5 years since the housing crisis began; yet the same questions continue to plague our conscientiousness. How do we fix it and when will it end?
Owning a piece of the American Dream has been an aspiration of most people for generations. A place to call your own, a place to raise a family, a place where treasured memories are made, and a chance to have something of real value both financially and emotionally that will endure. The last several years have tainted that dream with financial collapse, high unemployment, rampant foreclosures, lost equity, and devastated neighborhoods.
The blame game rages on with tales of corrupt elected officials creating terrible legislation to gain votes, greedy Wall Street bankers raking in fortunes on shady investments, lenders making fraudulent loans to reap huge profits, loan originators selling convoluted mortgage products for outlandish pay, Realtors pushing up prices to increase commissions, and homebuyers willing to say and sign anything to get their piece of the pie.
In reality, the blame is not with the participants, rather with a singular flawed premise that everyone believed. A belief that shattered hopes, destroyed lives, and brought the economy to its knees. Real estate prices will always rise! It is a principal that everyone had believed for decades, even centuries. This one belief was the foundation for all that followed.
Congress passed legislation to open the door of homeownership for more of their constituents. What better way is there to stay in office than to help voters own the Dream?
Investment vehicles were developed by Wall Street bankers to increase the supply of funds for mortgage lending. It’s how moguls have gotten rich. Who wouldn’t want to invest in real estate?
Lenders developed mortgage loans with ridiculously low payments and weakened standards. If the payments adjust higher later and the borrower can’t pay, they can just sell the home, make a profit on the appreciation and move on to the next one. How can you lose?
Loan originators sold those mortgage products under the same premise. What’s wrong with a loan if there are no losers and everyone wins?
Realtors marketed homes based on rising prices and a decreasing supply. Why would anyone want to wait and pay more for the same property?
Homebuyers became enchanted with the idea of owning a bigger and more luxurious home than they ever imagined. If you can live in a great neighborhood with payments cheaper than rent, why wouldn’t you do that? After all, it is the American Dream!
Economies boomed, everyone had more, and life was good.
Then the peak of the pyramid was reached and the dream became a nightmare. Prices reached a level that even mortgage payments of interest only at 1% became unaffordable for the average working stiff. The dominos began to fall. Demand slowed. Sales dropped. The crazy loans began to reset, doubling and tripling payment amounts. Homeowners defaulted because the payments were too high and they couldn’t sell to bail out. When the payments didn’t come in, the investments soured. Loses were everywhere. There wasn’t enough money in the insurance pools to cover the losses. No one every thought such a collapse could happen, so no one prepared.
The human factor of blaming the other guy made the headlines. It’s not my fault. I was just trying to make a better life for my constituents. I was just trying to make a living. I was just trying to capture the American Dream.
Were there bad players is this horror story? Of course, but not to the extent that one may be led to believe as a result of the magnitude of the problem. Most of the participants were just getting up each day to work toward a better future for themselves and their families. The greatest get rich quick scheme in our nation’s history was an easy sell and we all believed it for a time. We all know they’re not making more land and populations are growing. Everyone has to have a place to live, so it’s only natural to believe in the ever-rising value of real estate.
The pendulum of correction has now swung too far. We have reached a point where the value of a home is less than the cost to build, where lending guidelines are so restrictive that the person that pays their bills can’t qualify for a mortgage, where over the top regulations have made the mortgage industry unprofitable, and where the risk of investment losses is too high.
This too will pass. The American Dream will survive. Homeownership is still a great proposition. There are no easy answers or quick fixes. We can only hope that the lessons of this crisis will not be forgotten and that the cure is not worse than the disease.