Stan is WRONG....
There is ONE primary factor, the 100% LTV, NINA (no income verification / no asset verification) loan available to borrowers with less than “A+” credit character (720 credit score). As long as the borrowers paid on these mortgages, the market would have stabilized and maintained some semblance of normality, but if these loans demonstrates higher than normal delinquency factors or default rates – we would see a crash that will dwarf the S and L crash.
These loans allowed virtually ANYONE to buy a home. With so many buyers “in the market”, prices just skyrocketed as eager owners watched their homes sell for thousands over asking price with multiple offers. It was a feeding frenzy as so many people jumped into the market and purchased homes that they not only couldn’t afford, but the loans themselves were also “ticking time bombs”. Loans, for example, that had substantial negative amortization, long term prepayment penalties and adjustment periods after as little as 24 months. Buyers were “betting” on continued appreciation so they could sell for a quick profit or refinance into a more favorable loan after the property appreciated.
Wall Street was peddling off these “safe” mortgage back securities to unsuspecting investors as fast as lenders and brokers could close them. In its peek lenders and mortgage brokers were bragging how they offered 100% stated income loans to borrowers with credit scores as low as 580. Wholesale lenders and mortgage brokers were popping up all over specializing in these high risk 100% “NINA” mortgages. At this peak, lenders would “bid” for the brokers loans. The broker would pawn off the loan to the lender that would make them the highest commission with little regard for the borrower’s ability to pay.
As suspected you just can’t offer mortgage loans to borrowers with NO money down, NO income or asset verification and credit scores under 600 and expect then loan to perform. As these loans began to suffer exorbitant FIRST PAYMENT DEFAULT figures, Wall Street reacted by ceasing to purchase these loans. Lenders could no longer sell them to Wall Street, so they stopped offering the product, since they stopped offering the product; a huge swath of buyers no longer could secure financing, with so many buyers out of the market, there were no longer a buying frenzy and multiple offers, so sellers had to drop their prices to sell. Soon there were MORE defaults and delinquencies and loans began to “recast” in the case of a Neg Am loan or the rates would adjust resulting in substantially higher payments so people began to stop making their mortgage payments all together and values began a never before seen tailspin downward.
The mortgage market essentially collapsed in July of 2007. If it was limited to just the “less than credit worthy” borrowers, the damage would have been less severe, but as values continued their downward trend, even the A+ borrowers found it financially unjustified to continue making mortgage payments on a house that now was worth tens and in some cases hundreds of thousands less than their mortgage balance. Even these “cream puff” borrowers began walking away, to suffer some damage to their credit history, but in a few years they could recover.
Like a junky to smack – it is difficult to control the euphoria that GREED can instill in people. Though the instrument of this debacle was a mortgage, it was basic GREED that fueled it from Wall Street, to the lenders, to the mortgage brokers, to the realtors and even to the BORROWERS all were caught up in making money.
Now we ALL are suffering.
