The Crash of Middle Class Housing - II

Hi, Ladybear.  I see you're going to make me work.. ;)

That's a good point.   All of us have a responsiblity to live within our means, but in the case of subprime lending, where home financing can be very creative, those lines are not always clear.

In this case, as Jim Cramer put it, most buyers followed what they thought, or were told, was the most rational decision.   In other words, they did what they thought was the responsible thing but got burned anyway.

I'm not very knowledgeable here, but perhaps I can explain.  

Historically, we've relied on banks to regulate the market.  As a home buyer, most people are more worried about 'not qualifying' for a loan than  the possibility that a lender is going to lend them too much or help them get into a house they can't afford.  It's created our national mindset, and again, because the banks have regulated themselves according to standard banking practices, everything has worked well for a very long time.

However, over the last decade, there was a shift in banking industry that the average buyer, unless very aware, probably never noticed.  We experienced a shift where bankers, often using middlemen, actively targeted a market of people who they knew could least afford homes.  “Easy Credit? No Credit!” “Zero Percent Down Payment!” “Creative Financing!”

And of course, the bankers did this with “teaser rates”–knowing that they could shift a
large portion of their liability after closing–and often with a “sell” to the buyer that as
the value of person's property went up, he or she could always refinance when balloon payments and higher rates materialized, thus starting the whole process all over again.

From the article:

Only a decade ago, subprime loans were a mere fraction of the home-loan market. Today, these financial instruments are an $800 billion business – about 20 percent of all housing loans.

I think the fundamental point for me is that this shift represents a change in the banking industry, not the buyers market. -  It's their game! - Of course, that doesn't dismiss the responsibility buyers have to themselves, but when this thing began to hit the fan and buyers found that refinancing was unavailable, not because of bad credit, but because in the wake of falling housing prices (also caused by this) and no equity in their homes (i.e. little or no money down) the buyers were upside down.

Because I recently blogged about the the documentaries Zeitgeist and America: Freedom to Fascism, it's probably worth mentioning that, like there, I see no organized conspiracy here.  Rather, I just see human nature, the allure of quick money, and greed.  That's what takes me back to the bankers.  - This was a fast buck.

It's also worth mentioning that ultimately I think the Federal Reserve is to blame. As I understand, by lowering interest rates and then raising them 17 times they created an environment that made all this possible.  I further see the inequity of their recent $71 billion temporary fix, which as I understand saves the bankers, but does nothing to help the homeowners or the average consumer who winds up with a less valuable dollar becasue of their intervention.

As usual, I'm ready to be corrected on just about anything, but that's the way I understand it.  :)

That works..  lol

As does building green.   :)

If everyone would start seeing these as a status symbol / investment there's no telling how much of this problem we could solve. 

Just had to add this.  I ran across it late last night.

 Can you spot the bubble?
(graph on site)

Jul 09, 2007 –  Today's home prices can best be described as a recession in the making, but are most often referred to as a bubble. Prices have grown so much in the last decade that they are now completely disconnected from the fundamentals that have historically ruled the real estate market. Today's prices are not sustainable and the graphs and analysis below demonstrate why.

——————-

Even more interesting is the graph for Japan.

“The country experienced a similar housing boom in the 1980s and is still reeling from the damage caused when the bubble burst.”

Thanks, Searching..     I'm glad to know you didn't bite!

More news:

“The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.”

“On an inflation-adjusted basis, the national median price — the level at which half of all homes are more expensive and half are less — is not likely to return to its 2007 peak for more than a decade”

- New York Times

And another:

“ON its way to becoming the nation’s largest mortgage lender, the Countrywide Financial Corporation encouraged its sales force to court customers over the telephone with a seductive pitch that seldom varied. “I want to be sure you are getting the best loan possible,” the sales representatives would say.

But providing “the best loan possible” to customers wasn’t always the bank’s main goal, say some former employees. Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide’s smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.

-  New York Times