What’s Responsible for the Mortgage Meltdown?
I got this response from Craig Nichols to one of my posts:
“In your email message, you made the following statement ‘the mortgage mortgage meltdown which was caused by greedy banks, ripping off the Wall St investors’. The banks were fulfilling a mandate of Congress. Congress caused this mess. The Community Reinvestment Act of 1995 was revised/written to relax the underwriting standards, so that more people could qualify for loans to purchase houses.”
Craig, I agree that whenever Congress passes any law, there are usually “unintended consequences” that usually do more harm than good. So, the less Congress does, the better.
And, in the case of the mortgage meltdown, what brought the situation to the “tipping point” was not simply relaxing underwriting standards. A chief culprit was collusion by the banks in how they decided to underwrite ARM’s (adjustable rate mortgages).
In particular, as most readers know, an adjustable rate mortgage starts out with some really low interest “teaser rate”. Sometimes the rate is also interest only which lowers the monthly payments enormously. Now, if the loan underwriters use this low introductory monthly payment to qualify potential borrowers, you get borrowers who only earn say $30K/y qualifying to buy $300,000 to $500,000 homes.
Of course when the rate re-adjusts in 1 to 5 years, the interest rate jumps to double digits, and starts to amortize. a $750 monthly payment jumps to almost $3300 which is more than their entire salary. Obviously, foreclosure is inevitable. This is now the fate of 100,000’s of homeowners.
And as I mentioned in my last post, the “Economic Recovery Act” just passed by Congress does nothing to address the problem. It’s simply a hand out to Fannie Mae and Freddie Mac.
What really has to happen is that the banks need to loosen their credit policies and only surgically correct those practices that got them in trouble in the first place–e.g., the underwriting of ARM’s and stated income loans.
Maybe this is something we can write our congress-people about.
Richard Odessey has been investing in Real Estate since 1999 and have bought, managed and sold over $5MM in assets over that time period. He has created a national network of RE investors that are a source of continual on-the-ground intelligence. Richard has also developed unique and proprietary tools to zero in on only high profit-low risk transactions.
