So what can we conclude from all of this – just what the hell DID happen? Who is to blame? Will this ever happen again? What is being done to prevent this from happening again? These are all good questions and I will attempt to address all of them in this conclusion. I do have to warn you – my conclusions are not what most people want to hear.
Just what the hell DID happen? In simplest terms, the sub-prime mortgage meltdown occurred because of a collision of arrogant stupidly and money. The arrogance came from the investment bankers who discovered the sub-prime lending industry. The problem was they had no idea just how it worked, and were not all that interested in learning. Along with the assurances of the bond rating industry, these investment bankers expanded a niche business into the dominate lending vehicle in residential real estate. The money came from the investors who wanted a better return on their investments, and who believed what the investment bankers said, and that the rating agencies actually knew what they were doing. At the peak, just about every bond mutual fund and pension fund, along with everyone from foreign governments to large insurance companies were heavily invested in these securities. Trillions of dollars were invested in real estate loans given to people who had little capacity or desire to pay unless the value of their home continued to increase. When the values stopped increasing, they stopped paying. When they stopped paying everything collapsed.
Who is to blame? In a word, everyone! The government (from both sides of the isle) for ignoring the signs of trouble and encouraging the process because so many people were able to buy homes, the investment bankers for failing to understand the nature of what they were facilitating, the rating agencies for giving such glowing recommendations when they had no long term experience with this type of security, the banks and mortgage companies for presenting these loan products to the public without considering just how the borrowers were ever going to pay, and the brokers and loan officers many of whom didn’t understand the loan products themselves and who were often involved in misrepresenting the applicant’s financial position. All of these people were culpable to various degrees. However, ultimately it was the borrowers who were all too willing to take whatever was offered to them and failed to use common sense. They just assumed that they could make a fortune in a very short time when the value went up, so being able to pay was immaterial. They signed documents that said “I/we promise to pay” and then afterwards decided that it was a bad decision. Please don’t misunderstand – I’m not trying to say that the borrowers were any more responsible than the rest of the players in this debacle; what I’m saying is that the borrowers were not blameless in the end analysis. They shouldn’t have taken out loans they couldn’t pay, and they shouldn’t have signed loan documents if they didn’t understand them. Yes, everyone is to blame!
Will this ever happen again? Despite what you hear on the news or what our politicians are saying, reality is this is never going to happen again regardless of whether the government does anything or not. People tend to remember really big mistakes. When was the last time you head of an ocean liner running at full steam through a bunch of icebergs? How many people are going to throw millions of dollars at a company with no earning, and no product just because it has “.com” in its name? Do you think that tulips are going to make a come-back as the next investment opportunity? No, no and no! The problem is behind us. Investors are NEVER going to dump trillions of dollars into untested mortgage backed securities again. Don’t get me wrong – People will forget this mess and years from now investors will make catastrophic mistakes due to ignorance and arrogance again. It just won’t be in mortgages.
What is being done to prevent this from happening again? Well, a lot; that’s the problem! Over the last few years your government has: 1) effectively eliminated most loan programs for consumers who don’t fit into what the government thinks is correct; 2) labeled anything except a fixed-rate loan as less desirable; 3) increased the costs and decreased the quality of the appraisal process; 4) dramatically changed the disclosure laws making loan disclosures more confusing and difficult to understand; 5) created a new Good Faith Estimate that fails to tell borrowers what they are paying in closing costs, what their payment will be, and how much money they will need to close their transaction; 6) increased the payment for borrowers using FHA financing while simultaneously decreasing reserves to the government; 7) created a national licensing system with educational standards substantially less than what is required of a licensed real estate sales agent – and then, excluded anyone who works for a bank from not only obtaining that minimal education, but from having to go through the background check, having to pass the examinations, or having to take the required continuing education; and 7) almost put the independent mortgage broker out of business. And they’re just getting started! Some of the new changes coming down the pike may reduce borrower options even more, increase costs even more, and make the process even more difficult!
So where are we now? The meltdown had two major effects on the mortgager industry. The first is the devaluing of mortgage backed securities as investments. Right now there is very little demand for mortgages unless they are “government guaranteed.” So while Ginny Mae (VA and FHA) and Fannie Mae or Freddie Mac (effectively government agencies) are purchasing mortgages, outside these entities there is very little capitol being invested. The limited capitol that is being invested outside of these entities wants a very secure investment and a premium return. What this means is that if you don’t fit into those very narrow programs, it is extremely difficult and expensive to get financing.
The second effect has been, and continues to be the government’s closing the barn door now that all the animals are gone. In a word: regulation. While most people think that regulation is necessary, the strange thing is that not one bit of regulation is directed at the people who created the loan products and guidelines that caused the collapse. They’re free to move on to the next industry and screw it up! All the regulation has done it make it more expensive and much more difficult to get mortgage loans, while drastically reducing consumer choices. The result is historically low interest rates and an anemic housing sector.