Experts cite a number of conditions that have helped fuel the housing bubble of the past several years and are also leading to its bursting. Here we look at some of the top contributors.
Lenders sold and refinanced homes at historically low lending rates several years ago, pushing up prices. As interest rates rose, these mortgage lenders targeted new customers and used nontraditional products in an attempt to maintain sales. They diversified into subprime lending, loosening lending standards to reach new home buyers. Lenders also expanded the use of exotic loan products – such as interest-only mortgages - across the spectrum of homeowners. Many products used artificially low payments at the start. This encouraged borrowers to buy more expensive homes which further boosted housing prices.
Guy Celela, publisher of Inside Mortgage Finance, offers a defense of lenders. "Delinquency rates were low, home prices were appreciating and the economy was strong." But, he says, the industry participated in "loose, if not sloppy, underwriting." Individuals with extremely poor credit histories received loans. Also consumers received loans that would become unaffordable once the teaser expired or interest rates rose.
Katherine Keest, senior counsel for the Center for Responsible Lending, believes the new products were a dangerous mismatch to customers. "Borrowers in the subprime market and the standard product terms of the subprime industry are risky," Keest said. "They took the riskiest of products and sold them to the weakest borrowers to compound risk."
Consumers put their money into their booming housing market of 2000, use refinancing to subsidize their lifestyle. "People treated their home like ATMs," Cecela said. "Taking $20,000 to $30,000 out of your home covered a lot of credit card debt."
Many borrowers repeatedly refinanced their homes. Few understood the new generation of highly complex loans. Loan documentation that documented payments for adjustable rate mortgages only under the current low rates did not help. Yet the low interest rates and rising home prices allowed borrowers to refinance at will, shielding them from the long-term impact of rising payments within their loans.
Read about 77-year old widow Jennie Halliburton's payments may skyrocket to 75 percent of her social security income.
The media printed for mortgage loan advertising that violated federal law. Many television and newspaper mortgage ads didn't follow Truth in Lending requirements. The regulation requires advertisements that include monthly payments and other terms to state the downpayment, repayment terms and the annual percentage rate. Often, like in the ad to the right, they do not.
Real estate broker Jose Semiday fields 30 to 50 calls a day from desperate Hispanics home buyers. He says television stations and newspapers for immigrants, a particularly vulnerable population, carried many ads. (I have a copy of an ad he gave me that I can scan for the graphic).
Regulatory agencies allowed lenders make loans consumers didn't understand and couldn't afford. The Federal Reserve Board had the authority to strengthen relevant rules but they did not clamp down on those making abusive or reckless home loans. Yet the Federal Reserve did not do so. Chief bank supervisor Roger T. Cole said the bank could have stepped in earlier to prevent the subprime-mortgage meltdown by curbing lax lending standards. "Given what we know now, yes, we could have done more, sooner," Mr. Cole said.
Other federal and state regulators with the power to curtail predatory practices also did not take the necessary steps. The Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation and state regulators could have changed disclosure laws or tightened states oversight of lenders and real estate brokers.
Experts blame Greenspan for taking interest levels too low and maintaining low rates in the early 2000s after the technology market's collapse drove the stock market down. Low interest rates encouraged speculators and investors to buy homes, raising home prices.
Greenspan also suggested lenders use creative alternatives to fixed-rate products as the bottom of the interest rate cycle. He praised the adjustable rate mortgages at the 2004 Credit Union National Association conference. "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he said.
Greenspan again praised a risky loan type in 2005, citing the growth of the subprime market from 1 to 2 percent of outstanding mortgages in the early 1990s to about 10 percent at the time. "Innovation has brought about a multitude of new products such as subprime loans and niche credit programs for immigrants," Greenspan said. "Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately."