Bogleheads

[mathwhiz]

http://blogs.wsj.com/developme....inancings/

[Rick Ferri]

As more information come out about defaults, it is appearing that sub-prime loans were not the problem. What this report and others are saying is that the housing problem was created by homeowners. The homeowners borrowing against equity and then walking away from their obligations when the equity disappeared; not only defaulting on their equity line, but defaulting on their primary mortgage as well.

So, who is REALLY at fault for the housing crisis? The banks? The rating agencies? The CEOs? No, the borrowers. The homeowners are at fault, and they should be held liable for their loans.

Rick Ferri

[rich]

[fishnskiguy]

[baw703916]

Come on, Rick. I agree that people should not not borrow money that they can't pay back, barring extreme misfortune. But banks are (or should be) in the business of determining the creditworthiness of loan applicants. Do you really think that the loan officers were doing their jobs in a competent manner? I don't want to invest in a bank that runs their business like that--fortunately most of those banks are no longer around.

Brad
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I don't foresee any Black Swans appearing in the future

[DaveS]

[Sidney]

[mas]

[Charleville]

So Rick you are basically saying that a drug user is totally at fault and the drug dealer is not at fault. I would be willing to bet you want society to come down hard on drug dealers so then why not come down hard on the banks and wall street too who peddled this stuff on every street corner. The banks have no responsibility to their shareholders?--so the homeowner must bear this responsibility to the bank's shareholders?-- at least the banks got bailed out and could keep all their skimmed off profits while the homeowner just goes back to his life in the apartment or mom's basement with nothing to show for their poor decision but a bad credit score.

[thenextguy]

[Wonk]

I don't have much sympathy for either side. There's a heck of a lot of blame to go around. The Fed, Congress, banks, borrowers, realtors, appraisers, etc. They all had a role to play.

Although I've stayed a renter all this time, I still find it interesting how people pass judgement on borrowers who walk away, but don't blame anyone else. The phrase "moral obligation" usually comes up. What a joke!

If I knew a borrower who was underwater by 50% and they told me they were going to walk away, I wouldn't think any less of them. In fact, I'd think they were finally starting to get smart and probably about to make a good financial decision for a change.

Loaning money is a business. You can't expect to loan 300k to some schmoe with no skin in the game and expect to get paid back. A fool and his money...

[MP173]

The banks had absolutely no business writing those loans. If the borrowers were to blame and need to settle the score, then certainly so do the banks who took the risk and wrote the bad loans.

Instead we have bailed out the financial institutions and many of the borrowers.

What will be the next bubble?
ed

[rich]

Yes there is lots of blame to go around. However, except in cases involving fraudulent lenders forging documents, the homeowner borrowers are the ones that broke the contractual agreement. Hence the borrowers deserve a substantial portion of the blame.
_________________
Best regards,
Rich

[thenextguy]

[market timer]

[rich]

[FrugalInvestor]

It's definitely a two-way street. Our country's philosophy on both the extension and use of credit has changed completely over the last generation. Unfortunately I don't see this changing. I predict that as soon as the economy picks up again we will go right back to our free-lending and free-spending ways.

[sscritic]

Many seem to be missing the point. The story is not about banks making bad loans, which they did, but about people who had affordable loans on houses they had bought at prices below current prices. Instead of sticking with the $150,000 mortgage they could afford, they borrowed an additional $300,000 and raised their debt to $450,000. How do you blame that on the bank? The bank could have said no to the loan, but the borrower should never have asked for it.

Is it really the bank's responsibility to keep you from doing something stupid? The bank has a responsibility to its shareholders not to make a stupid loan, but it doesn't have a responsibility to you.

[Adrian Nenu]

Common sense: don't borrow more than you can safely pay back.

For the most part, the ones who defaulted on their mortgages because they took on too much debt lack common sense.

Adrian
anenu@tampabay.rr.com

[thenextguy]

[manuvns]

refi should have even more strict underwriting standards . may be 30% equity

[Buysider]

market timer answered:

[Deacon Mike]

[Charles Mahaffey]

I would like to give a little history here. In one of the tax reforms many years ago Congress in their wisdom decided credit card and consumer installment loan interest shouldn't be deductible and did away with the deduction. Prior to this change in the law a second mortgage on a home was fairly uncommon and was considered a sign of financial distress of the borrower. Once people figured out that they could deduct interest on second mortgages, there are limits but they are often ignored by taxpayers and tax preparers, these financial products took off. Borrowers became willing to take the risk that they could lose their home in order to secure an interest deduction on their tax return. I am not saying this situation is all the governments fault but in my opinion it was a contributing factor in this situation. Major changes in tax law have unintended consequences as taxes do influence behavior.

[grayfox]

Two sides of the same coin:
Borrowers: Don't borrow money you can't pay back
Lenders: Don't lend money that will not be paid back.

I say kill them all and let God sort it out.

[3CT_Paddler]

[schnoodlemom]

Real life example: My former neighbor from across the street was the original owner on a 4B/2.5Ba, 2600 s.f. traditional home built in 1989. In 2007, he had to relocate due to his job and tried to sell the home before going into foreclosure with an outstanding mortgage of $260k. The house eventually sold short at $180k in late 2008. The fair market value was probably somewhere between the two, although the 2007 SEV valued it at $260k. As original owner, he most likely had an initial mortgage for less than $180k back in 1989. According to another neighbor, the realtor in the deal, he had used his entire home equity to just put 2 kids through college and the relocation came at a bad time. I don't know how the shortfall between mortgage and selling price was handled. In his shoes, I would have to pay it back, but I hope never to be in his shoes. I can't imagine this scenario multiplied many times over nationwide. Our area has been hit hard by job losses and declining home values, although we didn't experience the extreme housing bubble like other areas of the country. It's hard not to feel perturbed and a bit threatened by it all. Amanda

[ResNullius]

America is making a huge mistake bailing out the folks in default. There's been lots of talk about moral hazard, but that's all there's been, just talk. The best way to teach a lesson is to make folks suffer the consequences of their actions, particularly when the consequence doesn't involve personal injury or death. I've know many people who refinanced multiple times, each time spending the money on expensive vacations, bigger cars, or fancier this and that. Well, that's all I wanted to say.

[fishndoc]

The way I look at the mess is:

Winners: homeowners who refinanced and didn't pay it back (some used for good purposes like kid's education, most blew it on unneeded luxury items), the bankers who make big salaries and bonuses for making these bad loans, the real estate agents, contrators, and even construction workers who made money off the over-building. Even the building supply stores, and local gov't who received extra taxes due to inflated home values.

Losers: the Taxpayers, especially taxpayers who own their home and keep their mortgage paid, even though some of them are under-water.

One interesting aspect I have not seen addressed - these people are walking away from their loans because they can't make the payments and are underwater... What would have happened it the bubble hadn't burst? The probably still wouldn't have been able to make their mortgage payment. I guess they could have sold their homes for the mortgage value, but where would they have lived?

Wayne
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" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle

[heyyou]

There was too much greed.

From the home buyer or refi homeowner all the way to the stock optioned CEOs of the financial firms and their minions in the legislature that changed the law to allow those practices, they are all at fault. No one stopped feeding from the money trough and said this is not sustainable. They all said, I'll take the money now and worry about the consequences later. Later finally arrived. It always does.

That is why we diversify our investments, because we know that all businesses eventually fail and there are up and down cycles in the economy.

In my little town, there are many real estate sellers or mortgage brokers married to home builders. They sure had some good years of high reward, then the high risk became apparent. If the money is easy, you are not smart, you are luckily at the right place at the right time. It is wise to plan as though "easy" won't last forever.

[sscritic]

[tfb]

[chubaca]

[3CT_Paddler]

[digit8]

[1530jesup]

[avalpert]

[avalpert]

[3CT_Paddler]

[Chas]

[Chas]

[Chas]

[Chas]

[YDNAL]

[GRT2BOUTDOORS]

[fishndoc]

[ruralavalon]

[Jack]

[baw703916]

[dumbmoney]

Everyone profited from the credit boom while it lasted. The money that was borrowed didn't just go into building homes, it went everywhere.

But not to worry. The solution to a credit bust is simple - more credit. Sort of like the solution to heroin withdrawal is more heroin.
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I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.