Every once in a while, somebody will ask me “Who is to blame for the current housing and foreclosure mess?” Usually they want a short, snappy answer. The truth is that there is a giant pie of blame, and there’s plenty to go around. In no particular order, here are some of the culprits. This is my opinion alone, and you are welcome to disagree with me.
Fannie Mae. The Federal National Mortgage Association, shortened to FNMA and then simply Fannie Mae, is a federally chartered entity designed to encourage home ownership primarily by purchasing mortgages from other institutions. That meant that your local savings and loan would have the money to make new loans in your neighborhood. That by itself is not the problem; until recent years, they and sibling corporation Freddie Mac were only allowed to buy certain mortgages that met very strict criteria — so-called “conforming” mortgages. The old girl has been urging people to buy a house for years, selling us a bill of goods that somehow or another our lives would be magically improved by home ownership.
The economy. The sad truth is that wages have not kept pace with inflation for almost all of this decade, inflation has been under-measured, and housing prices have gone up much faster than inflation! Joe Average could not have caught up to the curve if he wanted to. The economy also got a lot of people into situations where they had to take out second mortgages or equity lines of credit to pay the bills. This left them with little equity and a higher mortgage bill.
Stupid accountants. I have actually had people tell me their accountant told them to buy a bigger house for the interest deduction! The money you “save” with this deduction is only the amount you spent on mortgage interest (not principal) times your tax bracket. Let’s say for simplicity that you have a $1300 per month mortgage and $1000 of that is interest. If you are in the 28% tax bracket, you are spending $1300 per month, your monthly tax savings is only $280. If you would have spent $1300 per month renting, then fine, you saved money at the end of the year. Many would argue that if you are spending more than $1020 on rent it’s coming out ahead. Many people doing this math forget to account for the additional $280 out of pocket each month. If you are “just getting by” paying $1100 per month, this “savings” will bleed you dry.
An unscrupulous minority of mortgage brokers. Most mortgage brokers that I have known have done great work trying to get people into affordable mortgages and been brutally honest with clients about exactly how much they can afford (that’s why I prefer that clients get their pre-qualification letter before we even start looking). However, a few mortgage brokers have been all about the fees at the end of the deal, and will do anything to get it done. Even when that means putting people into a mortgage they can’t really afford in the long term. Perhaps they will even say tell the client to come back and refinance in a year — and they neglect to mention that they will rack up another fee to do so! They have ruined the credibility of programs meant for special circumstances by abusing them and the homeowners they sign up for them. “Stated income” loans? A necessity for those who are small business owners or paid largely in tips! Not intended for Joe Average (or his mortgage broker) to lie about how much money he makes so it looks like he can afford a house that he really can’t afford!
A similar unscrupulous minority of real estate agents. I’ve talked a little about them before. Some agents fixate on the fact that they don’t do a lot more to sell a $200,000 home than a $100,000 home but they get paid as a percentage of sales price. So some agents try to steer their clients up-market regardless of what they can afford. Agents like this don’t consider the effect this will have on their future business. You never know whether that guy you helped (or didn’t help) with the $100,000 home will just happen to be talking to somebody who needs help with a $500,000 home.
Appraisers in a Catch-22. Make no mistake, appraisers found themselves in a tough place a few years ago, particularly in the hottest markets. They were being paid to say yes! Yes! That house may have only been worth 80% of that last year, but it’s worth that now. Yes! An almost identical house on the next block sold for $20,000 less two weeks ago but this house is worth even more now. They weren’t going to get any business from their mortgage broker clients if they didn’t at least try to come close. At $300 a pop, they had to do what they had to do.
Overly enthusiastic buyers. Motivated by greed for rising housing prices and fear that they would be priced out, some buyers over-extended themselves. They never thought housing prices could go down. They refused to “just say no” to that house they love but just can’t afford.
Government programs to artificially stimulate housing demand. I’m not going to criticize the mortgage income deduction here, despite the fact that it’s the only “investment” that the tax code favors. Rather, I am quite critical of programs for first time home-buyers. President Bush has made widespread home-ownership a priority of his Administration as part of his Ownership Society and as a result has spearheaded several such initiatives. Unfortunately, there wasn’t really enough information and education to go with these initiatives. There are many things first-time home-buyers do not know and perhaps have never thought about. I think some of these buyers ended up in over their heads with homes in need of more repair than they knew how to handle, with bills they didn’t anticipate, perhaps in neighborhoods that were not what they first seemed. By the time they knew they were in over their heads, it was much too late.
And last but not least, the only individual I will single out.
Phil Gramm. The then-senior Senator from Texas is the prime architect of the banking deregulation resulting in “too big to fail” institutions. His further work deregulating the commodities and futures markets made possible the labyrinthine transactions that make it impossible to know just how big the housing problem is, nor how long it will take to completely play out. Further, the modern complications Senator Gramm’s deregulation allowed make it difficult for mortgage providers to modify mortgage terms to prevent foreclosures without violating contracts with investors who have purchased part or all of the paper.
While there are certainly other culprits, these are some of the biggest.
Cross-posted at BridgetMagnus.com.
Cartoon by Daryl Cagle, MSNBC.com