What Went Wrong?
It is not hard to find what went wrong. It really is pretty simple. Greed, Greed and Greed.
People demanded more, the free enterprise market saw a nitch and we all set ourselves up. This is not just a one party problem. We all participated in it. Everyone of us who bought, sold or refinanced a home, commercial building or a piece of land.
Back in the Mid 1990's there was an idea that the Banking system had... somehow they needed to compete with FHA providing 100% financing as VA did. It workded so well that Wall Street finally noticed. In 1998, Wall Street wanted to devise a way to compete with the Banks.
Wall Street promised large Mortgage Banking firms that they would buy up as many notes as they could provide under loosened loan requirements. There were still qualifications.
Most underwriters (loan approvers) were very strict in the underwriting at first. But competition for the Wall Street money provided by raising funds in hedge funds by securitizing the stock by selling shares, made qualifying the easiest in history.
Money spoke louder than rules. Selling to Wall Street instead of FNMA meant much higher profits more quickly.
These programs were really initially designed for the self employed. Self employed people do not show much income on their tax returns and could not acquire loans by way of conventional FNMA and FHMC. Well, at least not very easily.
Wall street knew the money was there and wanted to un lock its profit potential. Conventional rule breaking for acquiring the loans became a sport. It spread from there.
By requiring bank statements or, if the credit was adequate enough, allowing no income verification, just verfication of a license to work, or statement from a CPA or a tax man; meant instant approval for a new borrower as long as credit scores were above 620.
This was very effective hundreds of thousands of people got onto this program because almost every American is self employed outside of his or her regular work. Or, they could make a hobby a business, etc.
These programs have always been around but on very tight restrictions and were not delivered to the masses. They are still here today even in this crazy market.
These loans were not that common immediately after 9-11 2001, however, once we got into 2002 the snowball started from a wet spot on mountain and Wall Street started competing directly with the banks.
The banks hated losing the potential billions of dollars to wall street. Competitive strategies were being devised to win profits.
So, in order to be in the game they created what you call "portfolio alternative loans" If a bank was able to sell the notes to a larger bank or to FNMA after 6 months to a years seasoning (seasoning means they had loans, not conventionally sanctioned but payments were made on time and tested) then the game was on and so was the higher profits potential coming more quickly.
This type of game had powerless referees, no umpire. Everybody made the first down. Everybody who struck out was sent to first base anyway. Everybody was left at the gate to fend for themselves. The rules of the game became unclear.
The benefits sure outweighed all misunderstanding. Very few are not finishing the race. Many are fourth down and long still in the game. Those who were given first base have some hope of advancing to 2nd base and eventually getting to home to play the next innining. Please remember most are able to hang in there if they want too.
Seasoning in some cases was thrown out the door if the "spooky" loans could be packaged with the conforming loans and sold at a premium.
Banks, Mortgage Bankers, and Wall Street were in full competition for the money being lent under this process and it became a hurricane. Qualifying became too easy.
The joke in the market place was "If you can fog a mirror, you qualify and can get a loan!"
Bankers, Mortgage Bankers, and portfolio lenders could make 7% to 15% gross over and above the value of any package they put together. These funds were paid all up front never to be seen again.
Thousands of borrowers knew that this would be very detrimental if they lost their jobs or the market changed. They all chose throwing caution to the wind and bought their first dream home.
The terms were too easy for the unprepared. How could they pass them up! They would regret it if they didn't act now... because... The terms were too good to be true and they might not keep these programs forever. We all now regret that so many are failing. Most are not failing.
Something else happened that no one really expected. Values of property rose in price too high, too fast because the demand was so high, because money was so easy to get! Values were exponentially artificial everywhere houses were being sold.
A one hundred thousand dollar home jumped within 6 months to 220,000. In some markets values were changing by the day. A person would make an offer on the house and the realtor would say... "we have 16 offers ahead of you, if you want to put in another offer you will need to come up over our asking price about $20,000.00 and you may win the sale."
This high demand and other factors caused an artificially expressed value on every home in America. The key states affected were California, Florida, Arizona and Nevada.
Equity in the refi market became a target for borrowers and lenders and money was now being made in acquisitions and refinancing or second mortgaging a property. Thus further setting ourselves up.
These loans were often called Sub-Prime loans or Alternative A loans or Portfolio Loans.
It virtually put some of the hard money lenders out of the market. They were not able to make loans often enough to compete so they lowered their requirements and lent on properties that had artificially inflated values. Setting themselves up for potential trouble.
Now, Today, they are trying to sell many of those properties after having foreclosed upon them because the economy went so sour and soft. (Don't worry too much about them they can afford it and they get the property to hold until the market comes back. They will make millions over time.)
This all came about because the mechanism for acquiring wants was firing on all cylinders. Too much profit was available instantly.
The tap needed to be turned off before the lake ran dry... too late for some now. Regulators were not watching the pond this time! There is still plenty of water to function but the tap is certainly set to drip. Why? Well it is still greed.
Make no mistake people got caught up in getting something for very little and sometimes nothing. Buyers would put nothing down and would think to themselves, "wow its only $400.00 more than I am paying in rent right now; I get to write off the interest and earn equity each year... I'm doing it now!"
We all have a factor of greed in our makeup. If we didn't none of us would ever enjoy Las Vegas, a lottery ticket, or a bingo game. Some individual greed is harmless when it is bridled. When is it bridled? A hard question to answer.
When you always can get what you want and a system accommodates you... It would be good to use some judgement because greed may be trying to pull you into its clutches. It is not even your greed but that of a system that sets itself up to capture you.
This is what went wrong. It is still going wrong because of greed. All the solutions are based in protectionism and greed.
Is it predatory? Perhaps. Is it worth any effort to find blame. We don't think so. All Market Corrections or the need for them are man made but greed is the driving factor innate in man.
We knew it was happening and we chose to let it happen and hoped we could maintain it or pay for it later. So it goes.
All of this is more the natural course of events. Much like a tornado in Kansas. You know that Kansas gets a tornado now and then. You chose to live there anyway. Maybe it's for a very nice job or maybe its because family is really close by.
The tornado passes through your town you are affected directly even if it didn't hit your house. We can't stop what is going to happen, we can only learn to prepare for the trouble left behind.
The domino effect is not as predictable as man would think. No one know's exactly where the dominos are stacked, and against what.
So what went wrong many times is being in the wrong place and being in the wrong time and/or state of mind. This with a smattering of Murphy's law tends to nip the young buds.
If it is too easy to acquire without normal processes of work it is usually sucking you in rather than fulfilling your need or want.
You may pay heavily for this or you may lose your acquisition altogether; except and unless you have an endless supply of money, and equity. If that is the case everything is free for you and ultimately your losses are recovered. The rest of us are in envy.
Many kids right out of high school at 18 years of age could get
loans and buy houses bigger than the properties their parents had. If you acquire it too fast and easy... it has no value really, If things get tough its just as easy and fast to walk away from it. You'll still wonder what went wrong if things start to quake a little.
Here is another scenario to add to what went wrong. Hundreds of people bought houses at high prices in 2005 and early 2006. Builders of new houses could no longer sell the properties at the original higher prices offered.
No-one was buying so they lowered the prices. Lowering the price is not necessarily bad but to lower it a hundred thousand dollars in some cases... It was hard to fathom.
At the end of 2006 and all of 2007 and early 2008; people realized that for the same money and for even less than what they were paying on their current homes they could have a much much bigger house.
They could be closer to work and enjoy rights of ownership much more. So they qualified with their good credit to buy the second house and then walked away from the first house... Adding to the foreclosure market and ruining their credit.
In 2007 people in busines went after consumer credit to hold them over till the market came back. Thinking 2008 would get us all back on our feet. In 2008 the consumer credit also went bust and perhaps billions of dollars across the country are delinquent or in bankruptcy. This is what went wrong.
There really is no one entity to blame for what went wrong. It is human nature to blame someone. Human nature may be the blame.
You probably have your own experience in some of these events on what went wrong. Very few are unaffected.
Things will get better. The economy will become more healthy.
Hopefully we will all have learned something. We will have learned something until we forget and the natural man and his greed sets back in.
It sounds so synical but its actually just cyclical.
It is very important to note that in the worse case scenario, 15% of the mortgages are being foreclosed upon across the country. (No one knows the exact percentage but the guesstimates are as low as 7% and as high as 15%). So take courage in knowing that many people who used these programs are grateful for them even today. It satisfied a need and most were able to afford it. 85% of mortgages are good and the bankers and investors are making very good returns.
What is going wrong now? Banks have tightened up credit so much that no one can borrow to boost production, payroll and new development.
This has become a very long rant but a little history needs to be talked about...
This whole process is much like what went wrong on a much lower fanfare scale in 1986 to 1991.
The savings and loans were put out of business by the federal government. This is our opinion. It is Reagan's most horrible legacy for all his conservative ideology and fiscal committment this was a big mistake.
Our country was robbed of billions because of over agressive regulators and the socialized government trying to stick it to the wealthy nouveau riche.
The air traffic controllers were sanctioned and stopped in their tracks but the oversight governors were allowed to be released as wolves in a cattle corral. They loved shooting the fish in the barrel.
The Resolution Trust Corporation stole billions from the economy. The wealthy got wealthier. The start ups were set back. Not for long and not all of them. Thank goodness.
That was 20 years ago. 20 years from now we will all be mad at another economic cycle's flat tire.
But then again, the Christians may eventually get their predictions right and we'll all be worried about some guy named Armegeddon and his seven seals.
We'll still be upset. Don't you think? But the only blame allowed will still be on the nature of men for what went wrong.
Hope to see you there!
What Went Wrong