For many of the people in our community in the Northwest the “foreclosure crisis” is not an exercise in economic theory or a lame talking point. To some degree we have all been affected by the recent financial crisis which involves the selling of consumer mortgage debt as if it were a security. The billions of dollars that are washing around banks and investment firms and pouring out of our federal government to solve the crisis give us a notion of the scope of the problem. But that is all so theoretical seeming.
Over the last few years in the consumer lending industry there has been a frenzy not at all unlike the one that gripped our area 110 years ago. In the 1890’s the Puget Sound area experienced a boom driven by the rush to riches in Alaska. Timber was needed on a large scale, outfitting, shipping. This was the staging area for the search for gold in Alaska. At the same time wood was needed to rebuild Tokyo and logs could hardly be taken down fast enough. Coal then was found and mined in Eastern King County. People here were getting rich fast.
With our frontiers pretty much explored and exploited, the vast timber reserves gone, we discovered that our growing number human resources were not just a labor force but a potentially rich field for financial exploitation. Traditionally the home loan market has been relatively stable. Everybody want to buy a house and the average home is occupied about seven years before it is sold again.
The savings and loan scandal during the Aust years of the Regan administration was tremor of instability in which the relatively unregulated savings and loan industry was found to be exploiting home buyers and investors. It was quelled with federal money and added scrutiny. While it devastated many people scope of the problem was relatively confined. Here a few savings and loan institutions disappeared (anyone remember Shoreline Savings and Loan?) and a few real estate agencies were hurt.
That paled in comparison to what happened more recently. A few years ago people decided that mortgage loans could be bundled and sold on the open market. Investment banking firms could buy and sell these things. For a long time banks had been making home loans and selling them to quasi government institutions, Freddie Mack and Sallie Mae. Suddenly there was a new market for these instrument and far greater demand than ever. Not only that but this new makrket was largely unregulated. Banking has been highly regulated since the Great Depression of the 1930’s but investment banking was pretty much wide open. When banks had only Sallie Mae as a buyer of their home loans, all the home loans had to meet rather strigent requirements, but with new buyers in the field those requirements could be fudged. This new demand also allowed lending institutions that were not national banking associations to sprout up all over.
The federal reserve cooperated by keeping interest rates low so that money for buying homes could be obtained relatively cheaply. A set salary could afford the monthly payments on a higher debt with lower interest rates. This was magnified by the now well established custom of married couples both working. The housing industry boomed, the building industry boomed and house prices soared.
This caused the proliferation of what had been a rather quiet industry: mortgage brokers. With interest rates low and all sort of different lending program, a broker could be very helpful in finding a good deal. Everybody made money by closing deals. The mortgage broker made money when the loan closed, as did the real estate agent and the lender. The lender made more money when it sold the loan to a bundler who made money when the bundle was sold and so on down the stream of finance.
Around here people were now more plentiful that the forests that they had replaced and we began profiting on each other with the frenzy of a gold rush. This was of course a national phenomenon and often the loan was made by a far away lender but we were certainly on the front end of this financial sunami.
Somewhat ironically greed seems to flourish best when money accumulates. It must have to do with oppotunity. At any rate significant segments of our community sttod to profit by getting loans to close. Even the lenders were not motivated to make sound loans becasue they were just selling the paper upstream. Big profit depended on large vloume.
I’ve recently met a few people who were sucked into this vortex of greed and induced to obtain mortgage financing. I’ll tell you about one of them. Nancy was a retired widow who wanted to buy a small home in the Redmond area but everything seemed too expensive, even the modest homes that she desired. She met a nice lady in a senior singles group who worked as a mortgage broker who told her that she should not be put off by the price. Instread she should look at the amount of the monthly payments and she should gage what she could buy by the amount she would have to pay each month. Prices increased quickly enough that she should view the payments as an investment because when she sold she would make a lot of money on th eequity she built up.
This made sense to Nancy so she decided to at least have a real estate agent show her some houses. They found a modest house and the real estate agent assured her that it was an excellent investment; houseswere going up in price so much that she could always sell the house without any trouble and after a year or so sell it at a profit. Nancy did not want to sell the house but this did give her comfort. She went back to her “friend” the morgage broker who said that she was getting a great deal on the house and that if Nancy did not buy it she would.
When Nancy asked about financing she was told that the payments would be about $1,300 per month. This was a bit of a stretch but something that she could afford. The broker ran off some numbers and printed a page showing that her payments would come to $1,334.50 each month. She was told that by renting the basement (which could be used as a stand alone aprtment) she could easily afford this. Nancy then signed a purchase agreement and went back to the broker who asked her to sign a poan application. She got a call a few days later from the mortgage broker who told her everything was ok and she would receive the loan. She then waived the financing contigency and was locked into buying the house.
Before the closing she went to the borker’s office again and was told that everything went smothly, that she had to tinker with the application a little bit but it was no problem. A couple of days laterwent to the closing office at a title company to sign the papers. She overwhelmed by the stack of papers that awaited her there. The note that she had to sign was three single spaced pages and was utterly incomprehensible. The Truth in Lending sheet showed that the amount would increase over time but not over $1900. When she called her friend about this she was told that this would not occur for anumber of years and that it would be covered by the rent of the improved basement out and anyway she could always sell the house for a profit.
That was two years ago and now she has monthly payments of $3,900, which she cannot afford to make. Foreclosure has been commenced and the house has been listed for six months without an offer. When the foreclosure is completed she will have lost her down payment of $100,000 and installment payments totaling about a third of that. The truth in Lending discloures were false, but the subprime lender that made the loan is long gone and bankrupt.
There are many people in Nancy position, truly victims of unscrupulous lending practices. I rankle when the “foreclsure crisis” is blamed on greed-driven consumers. Most victims are just people who were not very sophisticated and whose fault was misplaced trust.