This question has been rehashed by the talking heads on T.V. time and time again. We all have our theories as to why it happened and who are the villians. Some say it was the fault of the banks. Some say it was the predatory lenders. Some say it was investors buying up property causing inflated values. Others say that it was the "perfect storm."
According to a study recently released by the Mortgage Bankers Association and conducted by the University of Maryland, poor data, incomplete performance metrics, short-term focus, and unrealistic optimism among senior business managers contributed to the housing downturn. The study analyzed the risk management processes employed by mortgage lenders leading up to the housing crisis and discusses lessons learned for future risk managers.
Key findings from the study include: Subprime loan underwriting criteria expanded between 1999 and 2006 and a false sense of security with new products originated prior to 2007 occurred as a result of better than average economic conditions.
Hmmm. Sounds like a perfect storm and few heeded the warnings because so many were getting what they wanted - finally! Investors were making money. First-time homeowners were getting a home for no downpayment, with expectations that in a few years, they could sell that starter home and make money that they could then put down on a BETTER home. Lenders were of course making money.
What those of us on the ground saw happening during those good 'ol days were too many buyers risking basically only their credit scores for those expectations because they had no "skin in the game." No money of their own was sunk into their investment. Human nature requires some accountability, without which it is that much easier to walk away and leave the mess to someone else: you and I. The homes that these buyers left behind were indeed messes. Browned, unkempt landscapes and ill-used interiors needing to be labled, "mild fixer."
Of course, caught up in the storm were very responsible homeowners who did manage to refinance and hang on for as long as they could to their very well maintained and loved homes. A lost job or scarce contracts for the self-employed put these homeowners in the very same position as the risky buyers, and the stigma of foreclosure. It has been painful to watch up close.
A one-size-fits-all bandaid cannot work for even these two scenarios. That is why I am pleased that California has passed a bill to protect responsible homeowners from having to pay income tax on their forgiven debt! These homeowners should not be lumped into the same box as the risky buyer who easily walked away from a mess.
A perfect storm does best describe the housing downturn. And in any storm of life, we must learn something as individuals and as a community and as a State. You can't get something for nothing. If you have, beware of the strings attached.
To obtain a copy of the report, please visit the RIHA Web site at http://www.housingamerica.org.
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