Saturday, October 16, 2010

Lenders Share Blame

Here is an article in Fortune which tries to place all the blame for buying homes they couldn't afford on buyers, saying it wasn't the lenders fault. I think that argument is too strong.

The typical home buyer doesn't know much about finance, mortgages, this whole complicated real estate business. I suspect this is especially true of those who ended up with high-risk mortgages. Such individuals rely on others for advice, often given by people who stand to benefit from writing a mortgage.

I expect most advice-seekers were advised that home prices had been steadily rising - this was true. That if this price rise continued, as it had for years, they'd be able to refinance easily within 2-3 years - again this was true. That there were tax advantages to a home mortgage - again true. That price rises after one buys a home create effortless equity, often very rapidly - once again true.

Do we know how many mortgage-seekers were warned that property prices might be a bubble that could burst? Most people working in the industry had probably never seen a bursting real estate price bubble. It is hard to take seriously something you've never experienced. If you don't take it seriously, it is hard to warn others about it.

I'm sure some mortgage seekers were lied to, misled intentionally. I suspect many more were advised to "go for it" because the folks advising them, on whose advice they relied, sincerely believed they were telling the truth. The advice was still bad, but the intent was mostly honest.