What If People Had Not Bought Houses They Could Not Afford?

I have read somewhere that there are “business cycles”.  Perhaps we are at the bottom of a cycle.  I sure hope so.  I have to wonder what it would have been like now if lenders had not lent to people who could not pay the inflated ARMs that were in the agreements they signed a year before.  Unless this was the lendee's first property (because they were living with their parents) they must have had shelter somewhere.  Maybe the lendee thought of his new house as a glorified rental that he would walk away from when he could not pay the inflated ARM.  At least s/he had a nice place to live in for a year. And those who sold the houses must have had somewhere else in mind to live (unless the house was sold on spec).  So did they take their money, and move to Florida to inflate the local economy with all that cash flowing in?  

And why did lenders loan to the "unqaulified" lendees?  Why invest in that market rather than stocks?  Was it less risky?  Did they lack the knowledge to invest comfortably in stocks?  Did they knew they could bundle these mortgages, and sell them to some fools as “securities”? 

The business cycle would have ended at some point, but this seems a disaster that is beyond a “mild” recession.  Perhaps we should have not tried to “manage” this disaster, but rather accepted what was about to happen.  But then I have to wonder how our economy would be if we had paid our taxes rather than tried budgeting the national budget for the last eight years with “deficit spending”.

We could put all the blame on the lendee, but I think at least half belongs to the "businessmen" who created this mess.  But they've taken their winnings, and, hopefully, invested in the stock market (especially, the auto industry).

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And why did lenders loan to the "unqaulified" lendees?

Because a very, VERY large culture of fraud spread across Corporate America. This culture demanded that all means of circumventing regulations and morals be attempted, just to manufacture more profits. Eventually, the outright fraudulent nature of these accounting methods prevailed, and it was open season in the banks. Lying on mortgage applications was OPENLY encouraged in loan offices across the United States. Literally, loan officers in our supposedly trustworthy banks OPENLY coached people into lying about their income levels. They coached people on how to nip-and-tuck their credit ratings, just to make the loan numbers work. Loan officers OPENLY encouraged people to take out the MAXIMUM mortgage amount they could afford, under all these inflationary techniques. So, eventually, people who should have only undertaken $100K home loans (on very high loan-to-value (LTV) amounts, like 90%), ended up taking out $250K loans. THAT'S A GREAT WAY TO MANUFACTURE A FORECLOSURE 2-4 YEARS DOWN THE ROAD.

There is only one reason why a bank issues a loan with a "teaser" rate, or with a "pay option" that allows you to only pay the interest on the loan (and NOT the principal, so that the loan balance GREW each month despite your payments). And that reason is to ENCOURAGE MORTGAGE FRAUD.

And now these fuckers are getting bailed out with YOUR tax money, and that only means they will enact the same set of mortgage scams as soon as they can manage it. Note that mortgage fraud is a crime, but the FBI was far too busy chasing nonexistent terrorists to pay attention to a problem that has now caused hundreds of times more damage to the world than even the most dedicated terrorist group. So, it's likely that the FBI will continue pretending that there isn't an epidemic of mortgage fraud, which is very strange, since most mortgage fraud is very much like robbing a bank DIRECTLY. With HELOCs (you'll have to google that one) and foreclosures, we've let borrowers and loan officers conspire to ROB THE BANKS.

 This cycle seems to have occurred when "lenders" threw caution to the wind.  Maybe it is the same in every "cycle".  The price of goods and services were bid up, and then those things bought on credit could no longer be paid for.  The young "Masters of the Universe" who learned about these things in business school (but did not actually believe in history) were confronted with a disaster that was the result of their own greed.  Houses could not be paid for, housing pricees collapsed, lending collapsed, and businesses that rely on lending collapsed.  

At some point the cycle will start again, and a new generation will start to build their futures on investment and lending.  And they will forget what they had learned in school, and believe that the "business cycle" is something from the past, and that they can be as greedy as they wish.  Unfortunately, it is the rest of us who invest in the mutual funds that reflect the stock market they play with that will take the hit.

Old South End Broadway

The banks made these loans thinking that the market would always go up and they could foreclose on borrowers who couldn't make payments. In that case, the banks wouldn't lose any money.

Now the housing market has crashed, the banks have foreclosed and the government has bailed the banks out beyond their wildest dreams.

It seems that the only people who are out money are the people who bought houses and the taxpayers.

Who is to say that this wasn't the plan all along?

It may be hard for some people to believe that the borrowers are out money, but they are. When we hear low down payment, nobody bothers to ask the question "What were the fees?". Many people for example might have bought a $100,000 home with 5% down. They had to pay $15,000 in mortage fees and put $5000 on the principle. That borrower is out 20 grand and nobody wants to bail them out.

My oversimplified take on this: People buying houses that they could not afford ("Movin' on up syndrome") over the last ten or more years  is a key factor in the tanking of the housing market. The result is a housing glut in the city limits.

Over the past five years, several of my friends and family members and a former neighbor I do not know well sold their modest West Toledo homes and built  houses in Perrysburg, Monclova, and Waterville. (Another friend who lived three streets away from me bought a pre-existing home in Sylvania because it was "just $20,000 more" than the house across the street from me which they were interested in, and it was larger). Obviously, the bank was willing to loan them the 20,000 more and they were willing to take on that debt to have more space.

All of the above people I mention had a heck of a time selling their well-maintained, upgraded homes in Toledo that 15 or 20 years ago, would have been snatched up by entry-level buyers and young families.  They all had to concede to sell much lower than they wanted to after having the homes on the market long enough to be making two payments.

While they did sell, many others cannot. The owners of two houses down the street from me did the same thing--built in the burbs. Each had to give the houses up to the bank, which sold them for a song (one sold for $25,000 less than what we BOUGHT our house for in 1989)  just this past fall....bringing my home's value way down to be sure.

When people move to the greener grasses of the suburbs, they leave behind perfectly fine houses that fewer want because they can get a newer one at what they deem a reasonably higher expense...because the banks would give them the money. (I use the past tense because that has all changed). 

This takes down home values, and often shifts family neighborhoods to low-income rental neighborhoods, which shifts neighborhood commerce away to the suburbs, where the money is.

I tried to talk my husband into "moving on up" and building about five years ago--gosh, everyone else was!) Thank God he is thrifty and said he didn't want a whopper of a house payment that everyone else has. 

So, my oversimlified answer to the question, What if all these people had not bought houses they could not afford? :  The housing boom would not have happened, and that means that a lot of money would not have been funnelled into the economy, which means that there would have been slower, stable, dare I say  REAL growth, rather than inflated growth. A lot of older neighborhoods would still be thriving, pre-existing home values would be higher, there would be less blight in older neighborhoods,  a lot more undeveloped farm fields in Monclova and Perrysburg, and a lot fewer banks would have been making bad loans. In other words, we wouldn't be in this mess we are in now.




...economy.  It would have been saved, and invested.  Whether you put your money directly into stocks and bonds, or take the "safe" route of putting it into a bank (and letting them invest in stocks and bonds), the money would have been lent to businesses at a lower rate.  Putting it into inflated real estate seems to have been a fool's game.  Just like waiting for the real-estate market to go up so we can recoup our "investment".  

I live in an older neighborhood.  The two houses at the end of the street are now abandoned (one owner followed her job to Illinois, and the other is in prison), and we have another home in the middle of the block that has been abandoned.  They were good properties until the scavengers got inside.  Two have been stripped of their copper pipes.

I do not feel sorry for those who have left the city, and complained of high gas prices in the summer.  They are making economic choices that they will have to live with.  You are right that retail operations are following the population to the suburbs.  We have one grocery store that provides most of the products you would need if you did not have a car to get to retail operations further away.  He does a brisk business, and might even be considered a public service.   




Old South End Broadway

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