No Equity Loans Don’t Affect Me
That’s what I used to think when I heard those pitches over the radio. I thought people were crazy to get no equity loans and 125% second mortgages. I figured they were putting themselves in financial jeopardy, but what did that have to do with me? As we all know, it turns out this did affect me, it affected all of us. Because of these mortgage products the fundamentals of the housing market were changed. Home prices were inflated because there were fewer homes on the market because there were more home owners who could “afford” houses.
It follows a classic case of unintended consequences. Government officials were upset because people with lower incomes, predominantly minorities, were being rejected for mortgages. This had to be because of discrimination and not income to debt ratios, so the government instructed Fannie Mae and Freddie Mac to make sure the banks weren’t discriminating against these higher risk borrowers. But how did they entice banks to make these risky loans. Well, they bought them from the banks. They lowered their standards for mortgages they would buy so the banks had a market for the higher risk loans. In the old days, banks made their money on mortgages by collecting the interest, now they were making money on the transaction. They no longer had to worry about people defaulting, that risk was shifted to Fannie and Freddie. So what would you do if you had a no risk way to make money? You’d see the dollar signs and milk it for all its worth and of course that’s what the banks did.
Then the economy slowed, interest rates went up, and people with Adjustable Rate Mortgages started getting adjusted out of being able to pay their mortgage. Then house prices started dropping because there were fewer buyers and more houses. This snowballed until we got where we are today. People who should never have bought the homes they did are now without them. People who still have their homes have seen there value drop. Banks folding. Government officials pointing the finger at everyone else and not the rules they setup that created the situation. All because someone thought they had a great solution to end discrimination in the housing market.
Subscribe via RSS