What Caused The Mortgage Crisis

People gambled and bought way more house than they could afford assuming the ultra-fast appreciation would allow them to flip it within a couple years for a giant profit. HG TV made glamorious situations of morons flipping, homes and creating profits despite some of the dumb things they do during the rehab. Realtors ignored the idea of a Housing Bubble and are now struggling to sell homes even at steep discounts.

Homes prices are depreciating. People took risky loans to get as much house as they could possible get. Nobody worried about rate adjustments on ARM loans, because they intended to flip their home for the capitol gains way before rates went up. In particular Barney Frank of the House Banking Comittee was pushing lenders to make more loans available to more Americans, especially low income and minority Americans. Today he is calling banking executives on the carpet for making the loans he was pushing for, just a few years earlier.

From the Boston Globe
By Jeff Jacoby
Globe Columnist

Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods." Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

For example, in 2003, Congressman Barney Frank said,

"Fannie Mae and Freddie Mac have played a very useful role in helping making housing more affordable."
In 2007 Frank blamed the mortgage meltdown on
"Too little regulation." In 2008 Frank blamed "A conservative philosophy that says the market knows best."
So Frank first helped destroy the free market, then blamed the market for not working.
  1. In 2002 Frank nixed reforms of Fannie Mae and Freddie Mac
  2. In 2003 Frank stood as a bloc against any changes that Bush proposed to Fannie and Freddie.
Chuck Schumer was another big cause of the overall collapse. In a written statement, the Office of Thrift Supervision, which regulated IndyMac, said
"The immediate cause" of the failure was statements made by Sen. Charles Schumer, a New York Democrat. Mr. Schumer in late June publicly raised concerns about the bank's solvency.
John D. Hawke, the U.S. comptroller of the currency (regulator of national banks) from 1998 to 2004, had more pointed words for Schumer in a story in the American Banker newspaper today.
"If Schumer continues to go public with letters raising questions about the condition of individual institutions, he will cause havoc in the banking system,"said Hawke.
Hawke said,"Leaking his IndyMac letter to the press was reckless and grossly irresponsible. I don't see how he can be trusted with confidential information in the future. What this incredibly stupid conduct does is put at risk the willingness of regulators to share any information with the oversight committees. After this, you'd be crazy to share information with Schumer."

The top 9 campaign contributors to his 2004 re-election campaign were investment banks according to the Center for Responsive Politics:

  1. Goldman Sachs $270,090
  2. Citigroup Inc $241,100
  3. JP Morgan Chase & Co $135,550
  4. Credit Suisse First Boston $154,794
  5. Morgan Stanley $1194,000
  6. Bear Stearns $140,900
  7. Merrill Lynch $147,000
  8. UBS Americas $139,750
  9. Lehman Brothers $115,000
  10. Bank of America $71,600.
"Although this institution was already in distress, I am troubled by any interference in the regulatory process," said OTS Director John Reich.

Sen. Kent Conrad of North Dakota and Sen. Chris Dodd of Connecticut, both Democrats, violated Senate ethics rules in obtaining special, unusually favorable terms on mortgages from lender Countrywide Financial - a company that is the corporate poster-child for the national subprime lending meltdown. Dodd, D-Conn., refinancing his homes in Connecticut and Washington, D.C. -- at 4.25 percent and 4.5 percent.

The corruption didn't end after the banks failed. Rep. Maxine Waters, D-Calif., helped steered millions of dollars in bailout funds to a bank on whose board her husband served. Waters, a member of the House Financial Services Committee, arranged a meeting in September between Treasury officials and the chief executive of OneUnited, one of the country's largest black-owned banks, which requested $50 million in special bailout funds. Treasury officials told the newspaper that Waters didn't tell them her husband, Sidney Williams, served on the bank's board of directors and has owned at least $250,000 in stock in the institution. OneUnited has contributed $12,500 to Waters' campaigns - Whoops.

What to do when you have a mortgage on a house worth far less than the mortgage, and a rate that's expected to jump several percentage points? Homeowners are starting to walk away from their home while other are forced out through foreclosure procedures. Some neighborhoods are having problems with the high percentages of unoccupied homes. Cities are starting to have problems with ravers throwing parties, or squatters using homes as a place to sleep or do drugs.

There are a banks and hedge funds holding large inventories of homes: REO (Real Estate Owned). An REO is different from a foreclosure property in that the bank has already tried to sell it at a foreclosure auction and failed to get bids. Because the property was not sold, the bank became owner of the property. Banks do not want to keep REOs on the books any longer than possible, and this makes it a great opportunity for an investor. Not every REO is a good deal, but when you look at an REO you’ll commonly find that there is a lot of money to be made.

Banks lose money on these deals, but they lose less if they sell cheap now, than if they kept the property for another six months while they try to sell the property. Lenders want three things in a borrower right now; money for a down payment, good credit, good property. In other words people that are least likely to need the loan will get it. As we slide towards a possible economic recession even less people can afford to keep their homes or buy a new one.

Just like stocks; buy low sell high. While I can't say if Real Estate has hit it's bottom yet, there are what looks like some good bargins out there. The rental market is heating up, now is a good time to purchase real estate rental property.

There are a ton of sites online offering to help you find those bank REO properties - for a fee. Here's a site with all the banks with REO listings on their sites. There are some good properties at very good prices out there.

Don't make simple mistakes

  • Don't pay too much, offer lowball prices
  • Get a solid appraisal, and don't be afraid to walk away from a property that won't appraise where you need it
  • You should always get a good property inspection
  • Check for liens, always get title insurance