For my Real Estate Analysis class we did an assignment about the housing crisis. I had to write a 1 page response to the question, "If you can only choose one person/party/entity as the main culprit for the mortgage meltdown that has buried millions of homeowners under a mountain of debt that is far greater than the value of their home, which would it be? Please explain why."
I will be honest with you, before school I had no idea what really happened in 2007-2008. I just remember that all of a sudden I lost a bunch of money and wondered, "what is going on in America?"
Here is my essay (I got 20/20 points, so I guess I learned something.)
The main culprit of the mortgage meltdown is the human propensity towards greed. History has shown time and again that mankind rarely learns from past mistakes. In the case of the mortgage crisis there were several key events that set the stage for greed and stupidity to occur at unprecedented levels.
First, the idea that the “American Dream” entitled Americans to homeownership was fueled by the Federal Government during the New Deal in the 1930’s. The New Deal helped more Americans afford to buy homes by allowing access to 30-year mortgages. Before the New Deal approximately 40% of Americans were able to afford a home mortgage. Forty years after the New Deal approximately 2/3 of Americans became home owners. We now move forward to 1977 and the Community Reinvestment Act (CRA), which was a government regulation to help create “affordable housing” for low income and minority classes. While this regulation was meant to help more Americans afford a home, in affect it has now done the opposite. In 2006, according to the Census Bureau the homeownership rate reached a high of 69%. Since the housing bubble has burst the homeownership rate is trending down to more historic levels. The American Dream is just that – a dream. It is not entitlement or reality. Reality and common sense dictate that if you cannot afford to buy a home, then you should not enter into a mortgage contract. You should rent.
Second, lenders who were regulated by the CRA were encouraged to become more lax in their standards by offering loan products to subprime customers. This practice began to spread throughout the mortgage industry and then to Wall Street. From there the greed to cash in on the housing bubble was fueled by the credit rating agencies which covered up the risky loans, and then the mortgage backed securities that were sold to investors.
Third, the average, middle-class American wanted to get in on the action and decided to purchase homes that were priced well above their ability to pay. Many expected a return on their great investment after they were able to “flip” their houses and make a huge profit. Others felt that they could afford to take out home equity loans on their newly acquired “wealth” and became highly leveraged in debt. While house prices continued to climb the nation was lulled into a sense of security, prosperity and wealth. Americans forgot about history and the fact that house prices do not continue to steadily increase over time. As in any market there are times of decline and fluctuation. As the old saying goes, “if something seems to be too good to be true, it usually is.” Such was the case with the housing market, it was too good to be true.
While there probably is not a fix for human greed, there are several things that can be done to help the market recover. We must stop the idea that Americans are entitled to homeownership. While owning a home is a good and noble goal, it should not be taken lightly. The practice of saving money to put down a percentage of the home price needs to be encouraged. This can be done as lenders tighten up their standards once again regarding down payments on loans.
By deregulating the mortgage market and allowing lenders and borrowers to come to terms that satisfy their risk tolerance the market will start its course correction. If the federal government continues to try and regulate the market and throw money at the problem it will most likely increase the time for market recovery.
We must stop bailing out those who cannot meet their obligations because of their greed. The housing market needs to be allowed to hit bottom before it can start recovering and this includes the foreclosure on loans that are sub-prime and prime. While it may sound harsh, the reality is that the foreclosure rate will probably get much worse before it can get any better. We must allow foreclosures to happen, regardless of why a homeowner decides to foreclose.
Ultimately, the housing market will correct itself in time. How much time will this take? It will be up to the people in America who decide to wake up and learn a lesson from history to correct past mistakes. If Americans realize that home ownership is not a guarantee, if the mortgage industry is allowed to regulate itself and require down payments for mortgages, and if we stop trying to bail out those who have made bad decisions we could see a course correction in the next 5 years. If not, who knows how long we will continue to suffer the debilitating effects of the mortgage meltdown.
If you have time and want to hear some other opinions here are some links that you can check out:
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