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 A Perfect Storm Spreads from Wall Street to Your Street
by Tom Campbell
August 16, 2007
Wall Street has a case of the jitters, caused, in no small part by the ripple effect from home mortgage defaults. The impact is spreading from Wall Street to Main Street, then into neighborhoods across North Carolina.
A perfect storm of sorts started forming following the economic slowdown at the start of this decade. Coupled with the twenty percent population growth we experienced over the past ten years the pent-up demand primed the pump for a housing boom. Banks eagerly made loans to developers and to the many mortgage lending companies that popped up almost overnight, promising buyers no out of pocket closing costs, below market interest or even interest-only loans, and relaxed credit underwriting standards. The lure of profits found eager players.
Now add to this mix Jane and Joe TarHeel, many new residents to our state, told they can achieve the American Dream, home ownership, with monthly mortgage payments cheaper than rent. Not to worry about the sales price, went the siren’s song, because time would inflate home values to much more than they paid. In their dreams of building equity, with the implied assurance they would make money, buyers loved the affordable monthly payments and home sales rose faster than the thermometer on an August morning. Buyers were told there were risks, but the risks were minimized. They also had dollar signs in their eyes.
Many young professionals bought million-dollar homes with interest-only mortgages. Other buyers made minimal down payments, contracting for below market-rate adjustable rate mortgages. Most believed that even if interest rates increased in a couple of years and mortgage payments escalated too high for comfort they could sell for a profit and move on.
Loans were made to folks with questionable credit worthiness, unstable jobs, or with payments that exceeded the recommended 30 percent of their income for housing. This saga becomes more interesting when you learn that the mortgage companies that originated these loans sold them back to the very banks that had given them the bucks to start with.
When interest rates spiked and homeowners’ monthly payments escalated, many who were already stretched to their financial limits started floundering. Banks, afraid of sanctions from the Federal Reserve, found themselves swimming in troubled loans and cut or reduced the flow of funds to mortgage companies, sending many of them into bankruptcy. These lenders also initiated collection proceedings against homeowners, increasing the number of foreclosures in North Carolina by 40 percent in the last year. Personal bankruptcies in this country exceeded the number of those who graduated from college last year we are told.
We experienced a similar crisis in the late 1980’s, but it was confined mostly to the commercial markets. Some might consider this predatory lending on a higher socioeconomic scale. The storm will be fierce before it calms. The pain of losing your home is real, as is the threat to our economy; however we cannot understand why the government and taxpayers may be required to bail out those who gambled and lost.
We strongly believe in free market enterprise, but when these markets don’t operate efficiently and they ask for government help, that help should also include tighter regulations in credit underwriting, perhaps greater reserve requirements for banks and mortgage lenders, and increased mortgage protection insurance for borrowers. There is no way to protect people from themselves, but we can limit the storm damage. |
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