Tuesday, November 12, 2013
Blog Post 2: Bank Greed and the American Dream of Homeownership
The recent housing market crash of 2006 was attributed to several factors, with the mortgage banker’s willingness to provide home loans to subprime candidates as one of the strongest contributors. Subprime lending was evident within the Fresno region. Families who had the financial background that would make them unqualified to purchase homes in most economic environments were being approved at an alarming rate. Lenders pressured Fannie and Freddie to lower underwriting standards to maintain the growing flow of home-buying customers. By 2004, homeownership had climbed to a whopping 69%.
Lenders were experiencing booming business during this time. Home prices were skyrocketing. The sentiment was it really did not matter how much an individual was borrowing, because the appreciation on the property would rectify and justify the financed price. The subprime market was the popular name for that market serving residential mortgage borrowers who did not qualify for standard hence prime mortgages (Diaz, Hansz). FICO scores that were less than the recent standard were suddenly being approved. Some mortgage bankers were also allowed stated income numbers to be factored into decisions, along with “full doc” applicants. Incomes were often being falsified to increase the likelihood of approval.
During the beginning of 2005, I was interning at a local mortgage company. I witnessed firsthand the greed of both real estate agents and the banks eager to issue more mortgage loans. Families would come in with below 550 FICO scores, and agents were chomping-at-the-bits to find ways and avenues to get them approved. It was evident to me then that there was something wrong with the economic climate of the housing market. Where homeownership was once a privilege and right that came with a history of financial consistency and responsibility, loans were being issued to families that would not be able to fulfill their new obligations.
Coinciding with the reduced underwriting standards, interest rates during this time period were lowered by Federal Reserve Policy. The climate was being set for the historic collapse. Another contributor to the Molotov cocktail that was being hurled at the American housing market system was Adjustable Rate Mortgages (ARM). These often had incredibly low interest rates initially, but further into the loan the rates were subject to increase and float below a max interest rate. The advantages for customers, or mortgagors, were a low monthly payment dictated by the low initial interest rate. Sadly, when the rates would increase, families were often unable to make their monthly payments. This is often associated with predatory lending. Predatory lending is the unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. It is the responsibility of the agent or brokerage firm to issue a mortgage that is appropriate to the situation of each client. Many agents and firms were aware that the increase in the ARM interest rate would bury many families in a financial payment that they would crumble underneath.
In conclusion, there were many factors and layers of the housing market collapse during 2006. Although the situation was multifaceted and stretched all the way up to economic policy, interest rates, and the reduced underwriting requirements of Freddie and Fannie, one must look at the ground floor of everything. The banks, agents and brokers who acted selfishly and with such greed were major culprits. The money was flowing in for the banks, and commissions were at an all time high for real estate agents. History taught us a valuable lesson in ethics. Going forward, one would hope that the perfect alignment of factors to the financial collapse would never again emerge in such brilliant and destructive unison.
"Housing Bubble and Credit Crisis (2007-2009)."
"Real Estate Analysis: Environment and Activities". Diaz III, J. Andrew Hansz