When I started selling real estate a little over a decade ago, if you were a 'low buyer on the totem pole' (sub-prime) you were relegated to FHA loan programs. If you were squeezing to get into home ownership you were still required to provide 3% down AND the home you were buying had to pass the scutiny of the FHA inspector. Not only did the borrower have to qualify, but the home also had to pass muster. 3% down on a home means that you actually have to make home ownership a GOAL, and you have to scrimp and save to make it happen.
Gee whiz, what a concept!
The GRAPHIC graph, below, shows that our Country somehow went from making borrowers accountable to the "fast food approach to lending" around 2002-2003. Did the lending institutions decide to join the ranks of the infomercial diet fads??! (No exercise needed to loose all of that excess weight...just pop a pill and...voila!) Same idea, different effect on us all.
In my (not so) humble opinion the subprime meltdown only sheds a HUGE SPOTLIGHT on the fact that the values in our county need to be renewed. (Thanks Grandpa for the wisdom!)
Good pay for hard work, set goals, work hard, meet goals. Anything worth having or doing is worth having and doing well...and EARNING.
How much pride can anyone have in something they have nothing invested in??? Beyond foreclosures, our neighborhoods will feel the depriciation for years to come as burdened homeowners with zero equity and zero personal funds invested in their homes allow them to rot.
I guess I am a little cranky after seeing this graph and reading the story that went with it.
My hope is that this subprime crisis will help us all get back to the basics.
Remember: Buying a house=buying a HOME.
Live Good. Be Happy. Be patient. Be INVESTED.
-Mimi
Who Is To Blame For The Subprime Crisis?
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Anytime something bad happens, it doesn't take long before blame starts to be assigned. In the instance of subprime mortgage woes, there is no single entity or individual to point the finger at. Instead, this mess is a collective creation of the world's central banks, homeowners, lenders, credit rating agencies and underwriters, and investors. Let's investigate.
The Mess
The economy was at risk of a deep recession after the dotcom bubble burst in early 2000; this situation was compounded by the September 11 terrorist attacks that followed in 2001. In response, central banks around the world tried to stimulate the economy. They created capital liquidity through a reduction in interest rates. In turn, investors sought higher returns through riskier investments. Lenders took on greater risks too, and approved subprime mortgage loans to borrowers with poor credit. Consumer demand drove the housing bubble to all-time highs in the summer of 2005, which ultimately collapsed in August of 2006. (For an in-depth discussion of these events, see The Fuel That Fed The Subprime Meltdown.)The end result of these key events was increased foreclosure activity, large lenders and hedge funds declaring bankruptcy, and fears regarding further decreases in economic growth and consumer spending. So who's to blame? Let's take a look at the key players.Biggest Culprit: The LendersMost of the blame should be pointed at the mortgage originators (lenders) for creating these problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default. (To learn more about subprime lending, see Subprime Is Often Subpar.)When the central banks flooded the markets with capital liquidity, it not only lowered interest rates, it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At the same time, lenders found themselves with ample capital to lend and, like investors, an increased willingness to undertake additional risk to increase their investment returns.In defense of the lenders, there was an increased demand for mortgages, and housing prices were increasing because interest rates had dropped substantially. At the time, lenders probably saw subprime mortgages as less of a risk than they really were: rates were low, the economy was healthy and people were making their payments.As you can see in Figure 1, subprime mortgage originations grew from $173 billion in 2001 to a record level of $665 billion in 2005, which represented an increase of nearly 300%. There is a clear relationship between the liquidity following September 11, 2001, and subprime loan originations; lenders were clearly willing and able to provide borrowers with the necessary funds to purchase a home.
There is Plenty of Blame to Go Around
Overall, it was a mix of factors and participants that precipitated the current subprime mess. Ultimately, though, human behavior and greed drove the demand, supply and the investor appetite for these types of loans. Hindsight is always 20/20, and it is now obvious that there was a lack of wisdom on the part of many. However, there are countless examples of markets lacking wisdom, most recently the dotcom bubble and ensuing "irrational exuberance" on the part of investors.
