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« Going Against the Flow | Main | Net Worth Review: July 2007 (What Goes Up, Must Come Down) »

August 16, 2007


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As I'm watching from behind the sofa on the other side of the Atlantic, I'll say that its American's fault. I know, not very exciting, but I'm pretty sure I'm mostly right.

People who got themselves into trouble were betting that real estate prices were going to continue to go up so they could borrow against the increased equity if they found themselves in trouble or they could sell their home at a profit. I don't see how they can claim to have been misled. If their bet had turned out correctly, they would have been bragging about their financial savy.
I purchased a house about three years ago. I was quite frankly astounded by the amount of money banks were willing to lend me. I ended up choosing to purchase a house that fit within traditional lending ratios (i.e. 28% of gross income) However, the banks were willing to lend me up to 45% of my gross income. And this was in a midwest housing market that was not one of the super hot markets found on the coasts.

FMF, exactly right: number one reason for this fiasco is greed. Some people were duped, but they didn't do their homework. They were blinded by greed. Mortgage brokers and bankers were equally greedy by letting credit standards fly out the window. And don't get me started on realators-- what would you expect from them?

This is exactly like the scenario of buying a computer. You walk into the store, buy the completely tricked-out machine, pay through the nose, then find out a month later it's 'obsolete'. Buyer's remorse just on a larger scale. You hit the reasons right on the head. (Lack of research, happy-path planning, no risk analysis, etc.).

The media hasn't been completely helpful with the constant inundation of how you 'should' be living here in the U.S. If you don't have a mansion, obviously you aren't successful. Keeping up with the Joneses has changed from a hobby to an obsession.

FMF, you are 1/2 right, in fact, everybody is 1/2 right. The declining value of houses is the other 1/2 of the problem. People can't refinance if the value of the house has declined. In some areas, the decline has been substantial. This decline started years ago as forclosures increased in almost every state in the nation. Washington and "Think(?)"tanks were oblivious (and still are) to this problem. Why? Because they are part of the problem. Outsourcing of American jobs is the base cause of the increase in foreclosures. No job, no money. Or, people have been outsourced from good paying jobs to 1/2 of what they used to make. If you want a clearer picture of this, take a look at most of Michigan. These drastic increases in foreclosures have been the sole cause of housing devaluation.As of today, shows almost 1.4 million homes in America in foreclosure or in trouble.
Call it greed as Bronco did and your're dead on! That's what is all about, GREED..corporate and investors. Have a good day!
Carl Heldmann

by the way, this housing/credit/mortgage bubble is not just isolated to the USA...

The greed that concerns itself with immediate payment than with the long term future. The greed of get rich quick. The greed of winning the gamble. And the fear of being left behind. The fear of never being able to own. The fear of not having taken the chance.

I do not agree with Carl reasoning that the base cause of these housing problems is caused by outsourcing. America has a vast of opportunities ( for employment and education) and as long as people value their career and treat it as their greatest asset, Americans will have no problems with outsourcing. Basically you are letting other people do inferior jobs, while Americans have the education and opportunities for the superior positions.

I do think that the housing problems are caused by ignorance and greed. Buying a house is a huge step. Buyers should be informed and aware of what they can realistically afford. Sellers and brokers will try to make as much money as possible in every transaction, whether is a car, a house or jewelry (I do not blame them, it is their job). So it is the consumer obligation to do their homework.

I agree that personal responsibility needs to be taken into account. However, this sword needs to cut both ways. For one, the market is already taking care of the financial irresponsibility.

How Each Party Pays:

#1 Buyers: Those that paid too much will lose their home and ruin their credit for many years. Appreciating in many metro areas went into an unbelievable dimension; we are talking about triple digit appreciation over a few years.

#2 Mortgage Shops: They are imploding left and right. Need I remind anyone of this? And this is happening because of #1

#3 Hedge Funds - Turns out those tranches are blowing up. What once was AAA is now triple junk. They are getting kicked in the groin. Example, Bear Sterns.

My issue with all this is those that cry for personal responsibility are okay with letting the Fed pump liquidity (corporate welfare) into the market in essence correcting the mistake of these mortgage operations. The buyer doesn't have this leverage. Who are they going to call? Yet these larger operations have the ability to get special treatment from a Fed that is destroying our dollar.

If this is to be about personal responsibility, these operations need to fail and let the bubble of 7 years collapse on its own.

i don't believe anyone was duped. i believe people choose to engage in selective ignorance. people want expensive things and they ignored the fact they couldn't buy those expensive things normally, so they were attracted when there were ways of obtaining those expensive things cheaper. the real price never went down, just the monthly payment did. People just ignored this fact. this was due to happen since we could see the beginnings through things like leasing a car, where people could buy a much more expensive car for lower monthly payments. could they afford the car in the first place? no, but people chose to ignore this fact.

my friends and i have been talking about ARMs and interest-only the past three years and have been waiting for this impending melt down over it so we could buy a house once the foreclosers came around. anyone with common sense could see that people who can't afford what they are buying in the first place, won't be able to sustain the purchase. i'm glad this is happening. perhaps it will get people to stop ignoring the fact that they can't afford what they want or think they want. I doubt it though.

Surely Cherly, you must be very young or naive. Try a different news source other than Fox. How do you tell the MILLIONS & MILLIONS of 50+ year olds that they have to start over, go back to school and be a what?. computer tech support?...NO, gone to India...customer rep for an airline, Chrysler, Bank of America, etc?...NO, gone to India. Work for the great American toy manufacturer Mattel?, Nope, China...Oh, I Know, Health Care, or maybe Wallmart.
You or your children, or granchildren are in for a rude, rude awakening.
I am in the housing industry. The increase in foreclosures started years ago right along with the outsourcing. This is a well documented fact. How long could you make mortgage payments if you lost your job, or had to take a substantial reduction in take home pay. Look at the Auto industry, Delphi, Textiles, furniture, the list goes on. FFM says he's debt free.He's a minority. Probably everbody on this blog site is. Check the stats. Over 80% of all Americans are over extended debt wise.
It must be nice to float above the masses.
Carl Heldmann

I blame the borrowers... then the lenders.. then the people who bought the loans from the original lenders..

Why does it matter? If a subprime borrower in trouble takes "personal responsibility" and admits he was greedy or stupid or whatever, will that suddenly allow him to make his mortgage payment when the ARM adjusts?

I agree. The simple answer is greed. Too many lenders were quick to offer mortgage loans to people they knew would not be able to afford them, then they would package them together and sell them off to other companies who bought them in bulk.

On the other side there is a group of buyers who went in blindly and tried to buy houses to flip, bought houses that were too expensive for them, or did not do the proper amount of research.

(I'm not even going to get into the topic of crooks on both sides of the fence).

The mess is complicated and it will be awhile before things settle down. Hopefully both lenders and borrowers will learn from this. Maybe the rules will be tightened a little to help prevent this from happening again.

Hi, I am a mortgage broker. I remember doing loans for people, begging them not to get in over their head and they said, "I can handle it" and I would make sure to tell them over and over again it was not good idea, but I am not in business to be everyones parent. If I told them not to jump off bridge and they did anyway, just because I built the bridge doesnt mean everyone should jump off and kill themselves, get my drift....

Well you're one broker, and I'm there borrowers like that, but there are many brokers who didn't tell borrowers the full story. Whether it was due to lack of experience or greed, it doesn't really matter at this point.

The way I see it, the mortgage industry had so many amazing years that it was inevitable to have a few horrific years as well.

I would blame lenders for their high-risk programs, brokers and loan officers for peddling them incorrectly, and borrowers for looking the other way when told their mortgage payment was 1%.

I know you have a pretty low opinion of "all financial planners, advisors, brokers, investment advisors, tax planners" but please don't include mortgage salespeople in with this group. Mortgage pimps need very little financial knowledge and have almost no regulation comparatively.

It's all my fault. Everyone can blame me if it will make you all feel better. Yes, I realize you have never met me, but I'm known as a good scapegoat.

Kristin, So now that you are going to have a hard time living off the mortgage industry for a while. How about selling heroin? Just make sure to tell your customers about how it will ruin their lives first and let them decide. If you know a product is junk, DON'T SELL IT! That is what a responsible. caring person would do. IT is time for all of us to wake up!

THC --


I would never sell Heroin!!
I had to offer the product to the customers even after I explained I didnt think it benefited them.
I am sure "quickie mart" store clerks dont yell at everyone when they buy a pack of cigarettes.
It's really up to the consumers to make their own decisions and use their own best judgement, I did my part, I told them of the "negative" effects of the loans they were choosing to go into.

I blame the american public--they wanted homes they couldnt afford just to look "rich" and be big shots.
We just gave them the financing. How many people drive cars they really cant afford, its the same thing.

I think it is your own responsibility when you buy anything - an appliance, a car, an education and a house to search for the best loan for the purchase. It is not the mortgage broker's/bank representative's/new house salesperson's job to find the best mortgage for you - their job is to sell you a product. Your job is to determine if the product they are selling to you meets your needs.

And if you don't do the research, don't read the mortgage agreement, don't ask questions about the mortgage product, well, I don't think you need to blame outsourcing of jobs for the increase in your mortgage payments down the road and your inability to handle the increased mortgage payments.

Everyone who buys a mortgage needs to pay for it. If outsourcing increases the difficulty of this payment process, then don't buy the mortgage and don't buy a house-rent. And if do buy the house and at a future date, you lose that job, can't pay the mortgage payments, then sell the house and rent. These aren't pleasant outcomes but they are necessary. You can't live beyond your means.

Fact of the matter is a lot of Canadians and Americans are gambling on the housing market. In Alberta, ordinary families are buying "extra" rental houses and putting their financial present and future at risk. I'm sure they may make a pile of money in the future by flipping the houses but they may also lose a pile of money when the market stalls. In addition they are using their personal home to invest, another slightly repugnant idea to any no debtor like myself. A house that you buy for your family is not an investment or a money generating machine. It is your family residence. And using the equity in your family home to buy rental properties is a very risky proposition. I go to the casino and bingo halls when I'm volunteering for my kids' sports and I see the same mania and enthusiasm there as I do in the current housing market. People don't seem to understand that there is a cycle in the housing market and that when and if the market goes down, they may be holding paperwork that binds them to properties that have less value than the purchase price.

I don't think this type of behavior is entirely rooted in greed. I think that people do have money to invest and don't want to invest in stocks, mutual funds or GICs. A rental property can be a productive way to generate cash if you understand that you won't be earning a great deal of cash for a certain period of time (while you have a significant mortgage on it). There aren't a whole bunch of areas for ordinary families to invest their "extra" cash in. We have a rental property but we have paid it off. What do we do with our "extra" cash now? Invest? We are thinking of eventually buying another rental property but only when our current home is paid off. The key is moderation. Check your mortgage paperwork, buy the best loan for the property, pay off the property and start again.

thanks julie!!!!!!

Well said Julie...

But when you're an ignorant liberal such as carl heldmann, you have a hard time understanding simple things and resort to blaming the government for everything.

Hey Carl, blaming the gov. for stores' selling designer clothes for 1000% profit? I know how you liberals like communism... How are you even reading these blogs, did you actually keep up with the technology changes since we now have computers? It's amazing that you did that but as you said other 50+ yr old people shouldn't be expected to learn new things or do different jobs.

Life isn't always fair and with technology changes every day, continuing education is a must. If you don't like it move to a third world country.

Aaah, my favourite, the liberal = communist comparison. And I though America had grown out of the McCarthy era. ;)

Having said that, no one has really tried communism properly (it has always descended into a dictatorship). Maybe it really is a better economic system.

FMF - Living in the thick of it in California I have to say you nailed it on the head. Even to the comment that home values dropped - well duh - of course home values were going to drop. The average house out here costs 12 times the average income, it doesn't take rocket science to figure out that these prices could not be sustained for the long haul.

Personal responsibility - few take it into consideration. But it is key here. My husband and I sat back and looked at the big picture when we bought out here and we formulated a plan. It means we owe $200k on a fixed mortgage which is pretty much unheard of for our age in the area. It took careful planning and avoiding these ARM things. We didn't buy at the peak (& wouldn't have) and we moved to cut our costs, etc. as we decided buying a crappy $500k starter home on $100k income was not a good financial move, and more importantly not how we wanted to live our life.

Most of our friends/acquaintances went like herd to slaughter. The loan companies were not right in selling most of the ARM and subprime loans and they overall have less to lose, but some common sense and financial sense on the part of buyers would have easily evaded this mess.

IT all comes down to greed.

You hit the nail on the head. People were willing to take adjustable rate mortgages out on houses that were way bigger/fancier than they could really afford because people in general have no financial discipline. What they want, they buy. That's why average credit card debt is so out of control. I would hazard a guess that the homeowners going into foreclosure today did not take a realistic look at their finances, figure out how much house they could actually afford, or run any numbers. They only looked at the monthly payment and either assumed that their payment would remain the same forever or didn't count on the prime interest rate increasing again so soon after it had dropped so precipitously. There was simply lack of research and questioning. You can't buy a house like you'd go and buy a cup of coffee. It's a big purchase. You have to educate yourself and ask questions.


It's funny that every time someone dismisses the liberal=communist analogy, that same person always defends communism as a better system in the same post. Just something I have noticed.

Just to come back on this. Belatedly.

Liberalism and communism are not the same, liberals put individuals at the heart of their political beliefs, whereas communism emphasises the group.

If I choose to defend communism, it is because I don't have as many hang ups about it as other people. I don't think it is like to be the best economic system because it doesn't truly exploit the power of the collective in the same way that the market does.

However, I live in a democratic country with effectively a communist system for healthcare which, whilst a long way from perfect, does fulfil its stated aims. I am also aware that communist parties form part of the regional government in world's largest democracy. Obviously some people like it, in some circumstances.

Ultimately it falls on the home buyer. If you bought a home with no money down (i.e. - no equity), with an interest only (i.e. - still no equity) payment, or a ARM (i.e. - I can pay it for a while then...), or you bought too much house (because you could) or were gambling that your no down payment/interest only scheme would work out because you "knew" the house would appreciate and the market would be strong if/when you needed to sell, etc. then YOU are to blame when you can't make the payment, have no equity, can't sell when you want to for what you want to.

Next time, put 20% down on a fixed loan and have a payment that you can manage and, guess what, it will work out a lot better. Imagine that.

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