Who’s at fault for the foreclosures? Lenders vs. Homeowners…
Unless you have had your head buried in the sand in the deserts of Egypt you know 
what’s going on in the mortgage and real estate world right now. A so called bubble is looming (or has it already popped? or is there even a bubble at all?) and real estate prices are going up at lower rates than the previous boom years not too long ago.
On top of that… foreclosures are reaching all time highs and are just picking up steam. Everyone has their own opinion on this fiasco and is pointing their finger at who’s to blame.
So, who is to blame for the deluge of foreclosures in the recent months and the sudden death of many subprime mortgage lenders?
Let’s analyze this a bit see who’s really at fault.
Are the lenders at fault?
Sure, just like with anything… there are some bad apples in the basket when it comes to lenders. A very minute (I mean very very small percentage) of mortgage brokers/loan officers out there truly knowingly “forced” people into loans that they knew would fail. Pick any industry and you will find the small percentage of dishonest people who will do anything to make a buck at someones expense.
But… I don’t think we can place the entire blame on the lenders for the recent rash of foreclosures. What is a lenders job?? To get the client a loan… right? Honest lenders will guide their clients toward loans that fit the clients goals and needs. Whether it’s a 30 YR fixed mortgage or 3 YR ARM, these loans have their place in the market and fill a purpose. For some, a 3 YR ARM is the smartest loan possible because it helps them reach their goals.
For instance, I have a buddy who just moved to town (I’m in Portland, Oregon) and didn’t want to rent. He wanted a condo and knew that he would only be in that condo for 2 years max. His mortgage broker tried to sell him a conservative 30 YR fixed mortgage because “that was the best option”. Back then… the going rate for a 30 YR fixed for my buddy was 6.25% (95% LTV). He seemed happy with that rate… until I explained it to him. “Why do you need a 30 YR fixed loan when you KNOW you will only be in the place for 2 years max??”
To make a long story short… he ended up getting a 3 YR ARM (the “so-called” scary loans) and an interest rate of about 5.875%. He’s saving some money every month with an ARM that perfectly fits his goals. His mortgage broker was actually putting him in a “bad loan” originally by guiding him toward the 30 YR fixed. If my buddy wouldn’t have educated himself on the subject of loans… he would have made a bad decision and gone with the advice of the broker.
So… lets turn the tables. What if my buddy had bad credit and really didn’t know how long he was going to stay in the condo. The broker tried to qualify him for the safe 30 YR fixed… but…. DARN! he couldn’t quite qualify him for enough to buy the house going full document. Broker surveys the options and sees that he can qualify him for a 5 YR ARM because the payments are a bit smaller.
Now, this is where the fault comes in. Who’s responsibility is it ultimately to make the fully informed decision on what to do? Is it the brokers? Of course not… it’s my buddies responsibility to survey the situation, carefully read the papers he signs, and use his own noggin to make a decision. I can bet you, no broker anywhere put a gun to anyone’s head to go through with a certain loan. It is always the consumers responsibility to do their own research and make their own informed decision. If the consumer goes through the process, does their research, and reads the paperwork that they are signing… it is their neck on the line… not the brokers.
Is it the borrowers fault?
After that rant above you are probably thinking that I will say it is the borrowers fault for all of these foreclosures. Well… I will say that the ultimate reason for these foreclosures lies in the borrowers lap… but it is the responsibility for an honest mortgage broker to protect their clients from making stupid decisions.
Here is what is responsibile for the majority of foreclosures today. (I say majority because there is always the people who truly did what they were supposed to do but hit hard times)
- The consumers addiction to credit and buying above their means.
- Ignorance on the part of the consumer and a lack of educating themselves on homeloans.
- The massive influx of inexperienced investors (i.e. Casey Serin) driving prices up and having lackluster exit strategies.
- The refinance boom in ’03 – ’05 which brought in a bunch of green mortgage brokers who didn’t know finance. Refinances started to slow… so they shifted to purchases which they had no or very little experience in…. resulting in guiding clients toward risky loans.
- The consumers handing over the responsibility of making the biggest purchase decisoin in their lives to someone they barely know.
Well, that’s a partial list. I’m sure there are a ton more to add, but I had to stop somewhere.
In conclusion…
The fault of the foreclosure spike rides on both the consumer and the lenders… but, ultimately the majority of the blame goes on the consumer who sat down and signed their name to their loan docs saying that they “understand” what the loan is… when truly not doing the right thing and taking responsibility for their decisions and mistakes.
Fault does ride on the lenders as well… but mostly in the respect that they didn’t stop their client from making a stupid mistake.
Do you blame McDonalds for making people obese or cigarrette companies for making people sick? You shouldn’t… it’s their job to sell and the consumers job to stand on their own two feet and make the right decision.
That’s that… comments??
(I’m sure this post will rile up a few people who
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Hey, my name is Trevor and I'm the founder of The REI Brain and a real estate investor since the age of 21. Right now, my focus in real estate investing is multi-family income properties and I have plans on moving more into the commercial real estate investment world in 2008 and beyond. 
I agree and disagree. sure, people should be responsible for their decisions, but the mortgage broker should also have an ethical responsibility to protect their client.
Here Here.
I am tired of homeowners blaming everyone but themselves. When someone signs loan paperwork it is important they understand it and not sign it if they don’t.
Personally I think they need to stop walk aways (the people who can afford the house, but walk away because it is underwater) which makes the problem worse.
Walk aways (people who can afford the mortgage but choose to should be liable for the remaining balance of the loan. They should get a nice little lawsuit in the mail and also be told that any and all property they buy in the future will have a lien placed against it for the balance of the loan on the foreclosed property.
Hey Vegas, Yep… I agree w/ you there. It’s just way too easy for people to walk away from their commitments today… what happened to responsibility and integrity (on both the borrowers and lenders part)?