Friday, March 21, 2008

Real Estate Meltdown-When Bad Loans Happen to Good Borrowers

The collapse of the real estate market has generated a lot of discussion from various pundits about personal responsibility. It has been said that many stranded homeowners especially in the sub-prime category contributed to their own financial woes by taking on a larger mortgage than they could afford, or by reckless borrowing against their equity. There is a lot of truth to this. I know that from my years of experience in the credit industry how people do in fact borrow and spend irresponsibly (sort of like the fiscal policies of the Reagan and Bush Administrations).

But what about consumers who buy property, especially their first homes in good faith, not to take advantage of rising values but instead based on the recommendation of financial professionals who advise their clients to go for it, even if they lack the funds to pay at least 20% down, or simply because they want a piece of the American dream?

That is what happened to my wife and me. We bought our home in 1984. Doing so at that time was against my better judgment, but we were looking for tax relief, and our CPA trotted out the cliche about having nothing to show for renting an apartment but a drawer full of rent receipts, and how home ownership would furnish a tax deduction for the mortgage interest.

We had a solid credit record, no debts, and an excellent combined annual income, so my wife and I certainly did not fit the sub-prime profile . But because we had less than 20% to cover the down payment, we were steered into an ARM (adjustable rate mortgage) which included monthly PMI (private mortgage insurance premiums). Fortunately, we were later able to refinance our way out this loan into a conventional mortgage, but we were still stuck with the PMI premiums for years to come.

As for those who got in over their heads by purchasing more expensive homes than they could really afford, they couldn't have done so without being "enabled" (aided and abetted) by the lenders who financed their mistakes . In the tract that where we purchased our home, many of our neighbors could not keep up their payments or refinance their loans, and thus lost their homes. Just as is happening today in many of today's housing markets across the country, this wave of foreclosures created an instability in our area along with a lot of abandoned properties that the lenders had no incentive to maintain after their repossessions were vacated. Often they would then rent to anyone regardless of their background and qualifications. As a result, the neighborhood deteriorated. In our own case we had a succession of next door neighbors from hell who were financially and mentally unsound and almost drove us nuts as well.

In short what we experienced in the 1980's was a foreshadow for the events that are now taking place in the housing market. Being ahead of the times one's time is usually considered an advantage. Instead, for us and many other homeowners of that era it was a disaster. This was shortly after the deregulation of the savings and loan industry, the excesses of which would result in the Keating scandal later in that decade. Meantime, S & L's were going hog wild creating exotic mortgage loan packages to the detriment not only of themselves but of borrowers as well. Sound familiar?

Deregulation and subsequent irresponsible lending played a role in the decline and fall of our neighborhood. We stuck out the aftermath but as I previously mentioned, at great expense to our psychological and financial health. We were trapped there for 16 years before we were finally able to sell our home for an amount that just barely exceeded the original purchase price. But at least we managed to get out in one piece.

The shame and degradation of that fiasco lingers with us through this day, but how much more traumatic it must be for those who lost their homes in the 1980's and for those who are facing foreclosure now. Heartbreak is a timeless emotion.

So when I hear the Republicans' praise of the "free-market" and their insistence on deregulation and "self-policing", the picture that comes to mind especially for the finance industry is pigs regulating themselves at a trough. Yet the government agencies that feed the oinking investment banks with bailouts refuse to spare a scrap for distressed homeowners. This is nothing less than state socialism for the business sector and social Darwinism for the working people.

So it's a wonder how and why the public allowed themselves to be hoodwinked by the Republicans in this decade after the abuses of the 1980's. It's as though the relatively benign fiscal policies of the Clinton era in the 1990's never happened. Well, as the old saying goes: Fool me once shame on you, fool me twice shame on me. All things being equal and after what this country has experienced, if the Democrats lose the election this year, then Americans are a truly hopeless bunch.