People often say that as a result of the crash millions of people lost their homes before they could pay their mortgage off. However, it also seems that the housing crash was directly a result of millions of people defaulting on their mortgage payments. Are both true? Is it just a roundabout way of saying that irresponsible bankers offered mortgages to clients when they should have known they would default? Does this claim have anything to do with changing interest rates, unemployment or the depreciation of housing prices?
In: Economics
The general public consensus is probably a bit prone to a less than nuanced understanding of the matter – the narrative of “bad predatory banks” vs “naive borrowers”.
There was failure. The system was somewhat self regulating. Banks did not lend to “risky” borrowers. There are two major push factors – people want to own houses and, generally speaking, there was political weight behind this. Counter to this pressure were that banks and investors who had funds did not want to assume too much risk.
The 2007 breakdown had several “causes” and this varies depending on what narrative one would be more inclined to accept. Post 2000, there was a shift away from the stock market and there was money available. A lot of this money shifted into real estate and this caused a rapid increase in real estate prices. Rising home prices, “reduced” the risk of lending (this is what makes a bubble).
With more and more interested money, creative financial folks designed new security products (CDOs for example) to allow more institutions to invest in mortgages. These products were complex and highly leveraged – so much so that even these big institutions didn’t really know what they were buying into. Through these investment products, banks could quickly resell even lower quality (ie riskier) mortgages to these institutions – and so they did.
Now the banks had even more room to offer mortgages – sooner or later they were giving loans away and it seemed (to the populace and government) that there was this dream scenario, more people could buy homes, home prices rose, banks made money, institutions had some good financial products to invest in. Win-win for everyone.
It simply couldn’t last, there are just so many people who could afford these loans, there is just so much money available for investments. Once new money looked to slow down, it didn’t take too many people defaulting for home prices to stop rising. The house of cards started to crumble.
There is more than enough blame to spread around. Regulators who should have stepped in and scrutinized these “risk free AAA” products, banks that should not have relaxed their lending guidelines, institutional investors who should have better understood these complex derivatives (or at least limited their exposure), homebuyers who unreasonably borrowed off the fantasy that home prices are always justified and will always increase, speculators buying multiple homes trying to “flip” a quick profit.
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