What Can We Learn From The Sub-Prime Mortgage Crisis?
The decade that became known as the real estate bubble was a time that could be equated with something out of a Charles Dicken’s novel: “It was the best of times, and the worst of times.” For many over zealous real estate investors, that era concluded in a sad state of affairs. With home equity lines of credit maxed out , credits cards rapidly reaching their limits, all eyes turned to the Fed with wonder, “How could this have happened?” I mean isn’t it perfectly acceptable to leverage your personal debt with your home’s equity? Surely there is something to be gained by over-borrowing, over-spending all while with a completely false sense of security. What can we learn from a crisis of this proportion? Are we to blame?
Viewing the Glass as Half Full Became the Demise of Many
When our Real Estate agent reported back to us that we would qualify for up to a half a million dollars in borrowed monies, my jaw hit the floor. After running the numbers in my head based on our meager single income, I couldn’t make any sense of it, the numbers simply didn’t match up. Something has to be wrong here. We accepted it graciously only turning around to eagerly max out our “spending limit.” Foolishly, we considered the appreciation history of our previous homes that were purchased during the real estate bubble that appreciated in value as much as 10-15% a month, turning a very handsome profit for us real estate rookies. Thinking that this aggressive appreciation is completely normal and the sign of a good, stable economy (which is all we, as twenty somethings had ever known) we signed on the dotted line and within three years we were experiencing what the rest of American homeowners were experiencing- we were upside-down in our mortgage!
Lack of regulation and poor underwriting were the main causes of the sub prime mortgage crisis. “Good underwriting includes both gathering and analyzing customer information before originating the deal…Gathering the information involves implementing procedures and analyzing it takes training and knowledge” says Kenneth B. Shilson, president of Subprime Analytics. Shilson elaborates by stating that “underwriters must be held accountable for their decisions…Pay plans should be structured so that repossessions are charged back against commissions. That way, everyone shares the pain for the mistakes!”
Where to Go From Here
Trying to navigate your way through the trenches of refinance options, ARM deals, balloon payments, avoiding PMI and all the heartaches of number crunching can be tough. Consider the situation too many people put themselves in a few years back. A good rule of thumb is to be as conservative as possible when it comes to purchasing property. The past few years haven’t shown enough of a recovery to warrant going out on a limb financially. With the regulatory agencies buttoned up righter than Fort Knox, qualifying for that mortgage could be a lot more difficult than in years past. Consider this a very good thing. Predatory lending and underwriter accountability are buzz words that light up red flags for the Fed and people in the “bizz” eager to turn a buck on commissions by doing imprudent practices will think twice, if not thrice.