I launched into a diatribe on Quiggleme.com on who bears responsibility for the bubble we are now watching deflate. I wanted to share it here. So who is responsible? Borrowers, lenders, investors, the FED: IMO, they are all responsible; it is only a matter of degree.
Irresponsible borrowers are like children, if you offer them something they want, no matter the terms, they will take it. The federal government realized this basic fact years ago when they passed predatory lending laws. Does that make the borrower any less responsible? No, but by definition, sub-prime borrowers are irresponsible. If they took responsibility for their debts, they wouldn’t be sub-prime. So if you offer a bunch of money to the most irresponsible among us, what would you expect? I would expect them to spend it irresponsibly and not worry about paying it back. That is their history, is it logical to expect anything different from these people? In my opinion, it shouldn’t have taken a rocket scientist to see this sub-prime experiment was going to end badly.
That being said, when will people start being responsible for their actions? Has our entire culture become based on having victim status and not being responsible? These borrowers should not be bailed out by any government program as it would just create more dependence. These fools who paid too much and can’t pay it back need to lose their homes, lose all their assets, and file for bankruptcy. Tough $hit. They may live their lives being irresponsible, but it doesn’t mean the responsible among us should pay for that. This is one of those instances where they will be made to take responsibility. It will feel like they are getting their noses rubbed in it, but that is what they deserve.
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However, the lenders are also responsible in this matter. I have a dim view of the lending industry, particularly of credit cards. Consumer debt lenders are akin to drug dealers in my mind. They serve no function in our society other than to leach off people by taking advantage of their inability to save money. But I digress, at least mortgage lenders provide a service because without them most people would be dead by the time they saved enough money to buy a home for cash; however, when they start handing out HELOC’s for consumption, they are as bad as the credit card / drug dealers preying on people’s reckless irresponsibility. Once mortgage lenders crossed that line, they ceased to be serving the needs of homebuyers and instead began serving the wants of the credit addicted: Shame on them.
Of course, none of this would have happened without the enablers at the Federal Reserve and on Wall Street. Greenspan lowered rates and then told borrowers to take out adjustable rate mortgages. As one might suspect, he did this so his fellow bankers would not be stuck with low-interest loans for 30 years, but he gave the world of homebuyers the “green light” for taking on high risk loans. Then Wall Street investors flooded with liquidity from cheap money from home and overseas started chasing returns. These high-interest sub-prime loans looked attractive, and as long as house prices went up and nobody defaulted, everything was fine. Who do you blame for that situation? The bank of Japan for creating the carry trade? The federal reserve for lowering rates to avoid a recession? Investors chasing high yields? I don’t know. That one is too big for me to ferret out a culprit.
In my opinion, the borrowers are certainly at fault; if for no other reason than they signed the papers and took the money. The lenders are also at fault because they should have known better than to give sub-prime borrowers loans they could not afford. Lenders simply cannot abdicate responsibility in this matter for financial, legal and moral reasons. The Federal Reserve and Wall Street investors are also at fault for creating the situation and enabling this to occur. In the end, all the responsible parties will be ruined: borrowers will lose their houses and go bankrupt, lenders like New Century will go out of business and/or lose billions, Wall Street investors will be sharing in those losses with the lenders, and Alan Greenspan will be remembered by history as the architect of the largest, most painful financial bubble in history.
Great comments and I applaud your points that do not just point the finger at one culprit, but that it is the combination of culprits with the end user (the home buyer) being the one to get the ultimate shaft.
I sold cars for a living for a while. People hate car sales people because they think they get ripped off. The biggest culprit is not the sales person, it is the one who is signing the papers and making the decision and then reviewing it AFTER the transaction, not before. The one who jsut lets the sales person make the decisions for them are the ones who get clubbed. (Amazingly, they are usually the happiest buyers….go figure)
I can only imagine how this is all going to unravel in the coming years. I have seen so many different takes on this situation: there is a bubble, there isn’t a bubble, this will cause a recession, this won’t cause one, prices will plummet. prices witl flatten, blah blah blah….
These blogs are the ones that make the most sense because you all are doing this for the love of the game, not to sell to someone.
Keep up the awesome work!!!!
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“…however, when they start handing out HELOC’s for consumption..”
Thanks for mentioning the Heloc Hell that has been occurring behind the wings of this mess.
A homeowner did not need to buy a home or refinance to get themselves trapped in this credit bubble.
I personally do not know anyone who is a sub-prime or Alt-a borrower, but I DO know many who used Helocs to finance their lifestyle. And many of these people are older. You would think they should be working towards paying down debt, not accumulating more.
Also, from a financing perspective, I find it very odd that people would use long-term, high interest rate debt, to pay for short term assets. Thats what the Heloc is all about.
Just another log to be thrown on the housing bubble fire.
Perhaps the older individuals using Helocs to finance their lifestyle are onto something. Burn that candle bright, so bright, in fact, that when you’re gone, there’s just a mountain of debt. Hopefully, there is nobody who can assume that debt responsibility in your absense. If people don’t care about accumulating debt, that the financial community allows it, indefinitely, you can live pretty good while it lasts. Personally, I believe in being responsible, and saving for what you need/desire–old school, I guess.
Great points!
This stuff goes even beyond housing. All these sub prime mortgates and everyone these days are using credit cards like monopoly money, all this stuff inflates the dollar. It inflates MY dollar. Everyone is running around spending money like drunken sailors and people with actual cash in the bank are the ones suffering.
Because so many people made artificial money in the housing bubble, other business have raised prices on everyday goods. Bottled water is like 5-10 dollars for a 6 pack. These business just figure that people are made of money, lets just keep raising prices.
Think of how affordable housing would be if there were no companies who lent money? Imagine if you had to come up with the entire price of the home ON YOUR OWN or you couldn’t buy it.
The people who suffer the most are the people who actually HAVE a few hundred K or more in the bank and could write a check for a house tomorrow if they had to….buy it free and clear. Those houses that are currently 500k, would be 50k.
What do you do if you CAN afford to write a check for a house? The system is set up so that you may as well take advantage of ‘borrowing’ like everyone else.
These overpriced houses are only priced according to the general public being able to secure no money down loans regardless of credit history. I’m just not sure how long its going to take for these prices to get back to where they belong. I keep looking in the real estate magazines and 2 bedroom condos on the beach in Hermosa are still 800k. There doesn’t seem like anything is happening to the prices, they are still artifically high and out of reach for anyone but multimillionaires.
Its got to kick in at some point. The stricter that lending companies standards get, the less buyers will be out there.
Housing in prime areas (so cal for example) will always be expensive, but i would think it has to come down somewhat within the next couple years. At least i hope so.
I’d like to buy a 2 bedroom condo/townhouse in the Del Mar, Ca area. Currently its about 500k in order to get something decent. Can property like this go down to 300k in a couple years or is that unrealistic?
Great article! I am in complete agreement with your comments. All are at faults including the Govt. But the bottomline is that the borrowers are the ultimate responsible party. If they don’t have the smarts to survive in this world then let it be. This is the beauty of free martket. If they are forced to lose their BMW and forgo their vacations then be it.
I am a upper middle class citizen in San Diego. When I first got here in 2006, I was in the market for a house. But I soon realized that I would have to be making 3 times of my income to afford a house that I felt was a middle class level. Back then, I could not understand how others could affort a house in So Cal. Now I know why. I started doing my research and realized the reason for this insanity.
Anyway, this is the beautify of free market right?
1. Greenspan 70% – The treacherous Gollum, use steroids to stimulate economy to exchange one more terms as Chairman.
2. Bush 20 % – just wanted to be re-elected, leave the whole mess to next president.
3. Wall St. mortgage bankers 10% – Use subprime to wash their hands.
The link between Bush and Subprime is the same as Saddam and nuclear weapons, they all go to extreme.
As much as I’d like to, I just can’t sign on to “the borrowers are at fault” arguement. I mean, its fun to laugh about stupid people have been buying homes way above their means, or irresponsible sub-prime borrowers who can’t manage their money. However, this thinking reflects a cultural myth…That Americans believe in personal responsibility. If you look at the difference between European attitudes and US attitudes, you will see this myth at work. Most (not all) Americans refuse to blame or hold accountable their government for unemployment, damage from the Mercury in vaccines, war, etc. In most European countries, its just the opposite. They place very little blame on the individual. Why is it problematic to blame individuals? Because this seems to be a one-sided standard. People are to blame for being unemployed, borrowing money they can’t pay back, etc. and they are expected to live with the consequences. But, the government routinely bails out, or covers up for corporations. The Savings and Loans bailout, the airline industry bailout… Where’s the personal responsibility there? And this happens far more often than we ever hear about…Its the corporate welfare state and its paid for with our tax dollars!
People, for the most part, are sheep. They follow the heard. If their friend gets a house with a risky mortgage, they gotta have one too. Most people don’t know one end of finances from another…if their subprime lender is telling them, “dont worry, we can make this work, everything will be A ok” than who are they to argue? They’re being told what they want to hear.
Blame this to AG 100%.
“It was the Federal Reserve-engineered decline in rates that inflated the housing bubble” — BusinessWeek, July 19, 2004.
Also, in a speech on February 23, 2004, Greenspan suggested that lenders should offer to home purchasers a greater variety of “mortgage product alternatives” other than traditional fixed-rate mortgages.
I’m not sure who is mostly to blame, all I know is that I don’t want my tax dollars to bailout this subprime mess. I don’t usually write my congressman, but I did this time in order to get my message across. If you want to do the same, you can use this link to write your representative. The link below leads to another blog that took the time to write out a sample letter, the page even has a link that lets the reader find their congressman or congresswoman so that they can email their letter.
http://patrick.net/housing/contrib/nobailout.html
Subprime’s are the reason most can’t afford a home to begin with. There was such a feeding frenzy that housing prices were artifically raised thru the roof….and now, no one is budging. 2 bedroom condo’s in So Cal are still a million bucks, take it or leave it.