I fully recognize and believe that there are mortgage brokers that pushed the envelope, broke the rules, and blatantly lied to their clients.
I fully recognize and believe that there are people losing their homes due to medical crisis, deaths of spouses, and severe job loss.
But these people do not make up all of the problems with the mortgage industry. If these situations are more than 50% of the problem I would be surprised. At any time, there will be people defaulting on their mortgages due to scenario #2. It happens in good economic times and it happens it bad. There are always foreclosures around. They just aren't in every neighborhood as we are seeing now. Places that weren't faced with foreclosures before are finding that people can't pay their bills.
I fully recognize that George W. sent out the "shopping" orders after 9/11 and continued to send out that message with every tax rebate.
Maybe it is just my not so unique place in the mortgage transactions that I have come to spot the abuse of borrowers.
The home across the street is in foreclosure because the husband couldn't bear to share the equity with his soon to be exwife. His sister lives two houses away on the same block. He hurt not only his own credit, his soon to be ex's credit, but his sisters home value by defaulting just because he could.
A not to be named family member, who really should know better, has liquidated all of the equity in his home to pay off credit card debt. At one point, he had over 50% equity in his home... today, he will be lucky to have 20% and that is with a newly finished basement. All because he and his wife find it necessary to buy stuff, do stuff, and eat out more than they can afford. They make more than your average American but if things get really tight, they no longer have anything to fall back on since they don't save any money either. Yet, these same individuals plan on selling their house next year and buying a new one at 1.5x+ the current value of their home just simply so their daughter won't ever have to be the new girl at school. They currently live within one of the top rated school districts in the state yet, they know won't be able to afford to buy a home in their current neighborhood. But, not changing schools in the future is far more important than starting off in one of the best kindergartens in the area.
A man took out $100,000 in equity on his home and with that money put nothing into the house. He spent it all on other things like vacations and toys. He didn't fix the water damage in the basement or the kitchen floor that has disintegrated. He didn't repair the broken window but instead he bought his son a car.
A couple took out 125% of the value of their new home and spent the extra on furniture, not on updating the 1950's kitchen which their loan officer, appraiser, and agent suggested. Today... they are lucky if their home is worth what they paid for it but they are still upside down. They thought their home value had caught up by now so that they had a profit. They wanted to take out the extra cash to go on vacation. Apparently they thought they deserved their home to go up in value just by painting the living room.
A woman, recently divorced, decided that she really didn't want to put any of the divorce settlement money into her house. She would just take a home equity loan to pay for the new carpet and roof that she needed. She spent the settlement money on a new car and a cool new bedroom set. Now that roof is leaking profusely and she can't come up with the money necessary to pay for it. The bank chopped the appraisal because of the market conditions and she no longer has enough wiggle room to take any money out to pay for that roof. If the roof doesn't get repaired, more damage with ensue. Because of her divorce, she doesn't have a credit card with a large enough limit to pay for the roof. Had she paid for the car with a loan instead of all cash, she would be able to replace the roof.
These are just a few examples. I have many others like the people who just decided to rip out all of their carpeting but then discovered they had no way to pay for it. Try getting a loan with no flooring in your house right now. Not a very good risk to take at the moment.
Yes, lending has gotten tighter. But now, everyone is being punished for the people who made bad decisions. There are very few suburbs in my area where the value is not declining on most property types. There are some areas where the only sales to comp out a home are short sales and foreclosures, not an ideal comparison.
Bad brokers, Bad Agents, Bad Appraisers, are the cause of part of the problem. Bad decisions by the borrowers is also part of the problem. A person getting buying a home or mortgaging a home needs to be realistic with their income. When we bought our house 6 years ago, we were qualified for way more house than we could afford. Our broker didn't push the issue because we told him outright that we were only going to pay a maximum of x dollars per month. When we refinanced, we wouldn't even consider an ARM unless it was a 7 or 10 year fixed ARM. Good thing that we listened to our guts and stuck with a 30 year fixed. We will be lucky to be out of here by 2011 when that ARM would have been up.
Don't forget that part of the problem is that many Americans feel that buying stuff is proof that they are good people. Many people have spent the last 4 years, refinancing their mortgage in January to pay off Christmas Credit Card debt instead of just scaling down. I have seen some obscene Christmas gift purchases and it has really taken the joy out of the holiday for me. Gone are the days when kids got clothes and necessary items for Christmas. Now adays if you don't have an IPOD by the time you are 10, you are practically considered abused. This is part of the fundamental problem. Many people think that $100 is no longer an extravagant amount of money.
Yet, not many have learned even through the last several months of issues. As soon as the rates dropped, those that needed to pay off credit cards were right back at it again. Not everyone that refinanced this spring had debt to pay off but many were talking about everything they were going to do with the "free" money they were getting. The worst part about this is that it shows just how uneducated and unaware many of the masses are... there are still people who believe that their home is worth more than it was last year or the year before. Every week I find one that thinks that because it is their home it must be better than Barney Rubble's next door. Not true folks... it just isn't always the case.
Yes, I am jaded. Some people just will never understand because they are too absorbed in their own lives to look out and see what is going on around them.