Banks Role in the Meltdown
By Andy Cruz
It’s impossible to talk about the mortgage meltdown and real estate industry collapse of 2008, 2009, 2010 without mentioning the role of the big banks, credit agencies, investment banks, Wall Street, etc. Now, the bigger problem stems from the idea that in order to get more people something we want them to have, we have to make the barrier for entry lower. In the case of financing real estate, that meant we had to reduce the minimum requirements required by underwriting in order to issue a funded loan back in the heyday of the real estate boom of the early 2000s. There were products such as no income no assets (NINA), no income no assets no job (NINJA), stated income stated assets (SISA), all of which were unverified methods of proving whether or not someone could pay back the loan they were qualifying for. Instead, the industry simply relied on the credit scoring models in order to determine someone’s ability to repay back the debt, they were getting by acquiring a home with a mortgage. Now, the credit score will tell us how well people pay their consumer debts, but it does not indicate whatsoever whether or not the person has the income capability to pay back their largest monthly debt expense – a mortgage. And this is the problem we faced during the massive housing crisis a decade ago. In order to get lower qualifying homeowners into homes and into mortgages, the industry had to reduce its standards which meant that investors had to reduce their standards, which meant that wall street allowed an influx of billions of dollars to become available to qualify and finance people that otherwise should not have been approved for loans.
Ultimately, we saw what happened. Once people were unable to make the monthly payments on the loan that they were given (but should never have qualified for) the collapse ensued. Banks were closed overnight, investment firms lost billions of dollars in a short period of time and we ended up with a flood of millions of foreclosed homes on the market which put downward pressure on home prices – thus values plummeted. All because we opened up the floodgates to borrowers who would otherwise not have been approved for mortgage financing.
So who is to blame? Well, in short, everybody. Every borrower who took a loan they shouldn’t have, every realtor that sold a home they knew they shouldn’t have, every loan officer who funded a loan for a borrower they knew would not be able to pay, every bank that offered a loan product which was risky, every investor who put money into it, every financial consultant who pumped money into a marketplace, everyone who participated in lowering the bar. Every single person who is a victim of the collapse played a part in the collapse. That may be a very difficult perspective for some readers to align with, but the truth is, anyone who had their hand in the market was ultimately part of the stew that went bad in the end.
Now, since this will not just be a doom and gloom article. Let’s turn our focus to how we can prevent things like this from happening again.
1) The finance industry must maintain a standard for which it allows people to borrow hundreds of thousands and millions of dollars. The wild-west approach to making financial products to get any and all people into homes ultimately hurts us for long periods of time.
2) People need to be accountable for what they can and cannot pay for monthly. This is the only way to reduce the overall risk to the individual, the bank, and the industry as a whole. Simply put, spend less than you make and budget for a “rainy day”.
3) We must maintain a standard of practice that promotes sustainable housing, rather than squeezing people into monthly payments and homes that are bigger than their monthly budget can afford. One of the things we say around here is “If you can squeeze someone into a home, the market can squeeze them right back out.”
4) As a consumer myself, it is my duty and responsibility to keep my monthly spending within reason, and with margin for unexpected expenses and surprises in my financial life. It will never be the bank’s responsibility to help you keep your job and your income in order to pay them back. It will never be the bank’s responsibility to make sure your monthly credit card payments and car payments are made on time to keep your credit score high. It is on each of us individually to be personally accountable and responsible for making quality choices that promote sustainable homeownership rather than put ourselves in stressful unrealistic situations, which could result in catastrophic real estate losses and collapse of an entire industry.
In closing, did the big banks help create the opportunity for collapse – Yes. Did we as consumers go all-in on it too – Yes. Do we need to participate in that again – Nope.
Keep your head on a swivel and remember that “Responsible borrowing” has the word “responsible” in it J Until next time.