Those of us who applied for a loan to buy a home in the so-called "old days" were required to produce all sorts of financial data. A person must earn three times the loan payment and the bank required two months of employee check stubs, bank statements and a credit check. If you are self-employed, you must also provide income tax returns for two years. But it does not end there. The average loan requirement for a personal residence is 10% down, if you are an investor it is 20% down and commercial property requires 30% down. So the real question is how did our lending institution get into this mess in the first place?
Let us suppose I am a banker
and I am processing a loan for a local person who is attempting to purchase a
home. The real estate market is
red hot and prices are on an upward spiral. My customer cannot possibly qualify for a conventional loan,
but I inform him that I have a one percent "interest
only" loan that is being offered by lending sources which would allow him
to qualify for a $600,000 loan on a house that he and his wife are interested
in. His monthly mortgage payment
would be a mere $500 per month and thus meet minimum income to loan
requirements.
The up side is this client is
given opportunity to buy a home, but the down side is the loan offered is an
altered version of variable interest rate loan. This type of loan offers a low "interest-only" rate for three years but, at the end of that time,
it would escalate to a fully amortized loan at market rate interest which could
be as high as 6%. Accordingly,
instead of a $500 per month payment, this borrower could be faced with a
monthly mortgage payment of $4,000 per month or more - which, of course, he
cannot afford.
Never-the-less, some of these
big time lenders claimed the borrowers gave false financial data thus
wrongfully obtained these low interest loans and the bank became a helpless
victim of a massive conspiracy.
This is absolute nonsense!
The bank had the hammer here - it was, and is, their duty to verify loan
information and they have all the tools to do it! Moreover, many of these lenders were aware that most of
these borrowers were investors engaged in real estate speculation and that they
intended to re-sell the property prior to the three year due date.
One wonders how any lender
can claim wrongful conspiracy when these same banks and financial conglomerates
actually bundled these toxic loan packages and sold them to unsuspecting
investors many of whom were relying on this investment to shore up their retirement
portfolio. Recently, JP Morgan
Chase & Company agreed to pay nearly $300 million to California's public
employee and teacher pension funds as part of a massive $13 billion settlement
with federal and state authorities.
In short, were the banks
necessarily to blame for the recession?
YES, the originators of these poorly constructed loans, and their
willingness to bundle and pass on this toxic mess to the open market place, are
the primary contributors to the subsequent recession. Moreover, $13 billion settlement is, in my opinion,
not enough. No one got jail-time!