Webloggin » The Housing Crisis in a Nutshell

The Washington Post has an interesting article concerning ‘the housing crisis” in today’s edition. It is a sad tale that covers all of the factors that led to the sub prime collapse including complicity by a willing client whose desire to own a home overrode all common sense and judgment. In the current political debate, that one very important linchpin is often overlooked. “Evil” lenders and unscrupulous real estate agents cannot ply their trade without the willful pigeon offering themselves up to be taken.

Looking back, Glenda Ortiz can see she did everything wrong when she bought her house in 2005.

Looking in real time she should have been able to see that, why would a Mary Kay makeup salesperson she hardly knows put up half of the down payment? Why would that salesperson’s brother enter into a mortgage for a house with someone he doesn’t know? Why would Glenda Ortiz sign any documents she didn’t understand and couldn’t even read because she doesn’t have a solid grasp of English? Where was the lawyer to review these documents? There is plenty of blame to go around. Deregulation and lax standards were certainly a factor here. Verifiable income and a reasonable down payment should be the cornerstones of any deal. Many in the Government are talking bailout and that should fall under the category of throwing good money after bad. Would any bailout have saved Glenda and allowed her to stay in a home she overpaid for and could not reasonably make the mortgage payments on considering the income she and her husband make combined? Owning a home is certainly a piece of the American dream and a symbol of our freedom but if one buys above asking price and finances 100% of that do they really own the home? As the woman in the story relates, it is all an illusion.

She agreed to a high-interest loan that would cost her more than $3,000 a month, more than 70 percent of the $4,200 that she and her husband brought home monthly.

A responsible lender should never have touched this loan and any real estate agent truly doing their fiduciary duty should have warned the client that she was overpaying for the house and her income was not sufficient to carry the mortgage on that large of a loan. Not mentioned in the article is what her husband was thinking at the time, if he was thinking at all. Doesn’t it sound odd that she was on the deed with another man but her husband wasn’t? Would that seem normal in ANY country? Unfortunately this story is all too common.

Another often ignored point is how the dishonest sharks of the immigrant communities pray on their own. Glenda Ortiz is not an uncommon story in the immigrant community wherein many of their less principled countrymen take advantage of their naivete and lack of grasp of the language and system. Though not unique to immigrants it is easier to take advantage of the less educated who do not have a strong understanding of the language and customs regarding housing transactions.

“It was all a mistake. One hundred percent,” Ortiz said recently in Spanish. “I had such a burning desire to have my own house. I didn’t think about anything else.”

When a client infused with desire over logic intersects with a scoundrel familiar with the holes in the system the outcome is inevitable if not predictable. This does not exclude non-immigrants who willfully take on more than they can handle either. Many did so counting on the ability to refinance and take the equity out of their home in some sort of futile effort to keep their heads above water and their dreams afloat. Eventually they hit the saturation point and the floodwaters of debt wash over them taking their home and credit rating with them. This is exacerbated in the current economic climate because of rising energy and food costs that make it even harder budget.

Blissfully unaware, Ortiz hung filmy white and maroon curtains in her home on East Reed Avenue. She put photographs of her family and the Sacred Heart of Jesus on the living room walls. She paid the mortgage every month, sometimes selling jewelry, forgoing other bills or taking out loans to do so. But she owned a home. She was happy.

A simple budget written down and examined before entering into a mortgage would have told Ortiz and her husband that this was a bad idea. The lender was complicit because $4300 a month is not sufficient to maintain a $3000 mortgage. No amount of creative financing would make this right and no bailout short of paying off a large chunk of her mortgage would have helped Ortiz and those like her. If they used to income of the other person on title to justify the mortgage then it was fraudulent in presentation if not outright illegal.

The one government solution would be regulations concerning income to debt ratios that make sense and reasonable down payment guidelines that prove the buyer’s fitness to pay the mortgage. A mistake would be to over-regulate the industry as government has a tendency to make matters worse. Financial relationships that rely on others than the proposed occupant to secure a mortgage should be scrutinized and the instances where this is allowed can be narrowed, the final solution is open to debate by those far more intelligent on these matters than myself but the events that transpired in this case and other like it defy common sense and can be easily corrected.

Like the stock market in the 90’s, people expected the housing market to grow to the sky. They ignored clear warning signs and even published rates. Adjustable Rate Mortgages are often singled out as a culprit in the current financial morass but if the mortgagee bothered to do the math using the adjustments outlaid in the contract they could have easily foreseen if they could have afforded the mortgage in years 3, 4 or 5 of the ARM. Assuming drastically increased income or wild appreciation is always a bad financial model for mortgage planning. Ridiculous appreciations could never be counted on as sustainable and assuming the ability to refinance to a favorable rate a few years hence is gambling unless one already has the means to do so.

Yes, deregulation and dishonesty had a role in the current housing fueled economic crisis but the overeager buyer willing to take on a mortgage they could not logically handle is a key component so often ignored by our media and politicians as they toss this political football back and forth. What we should actually be preaching is personal responsibility and common sense.

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