Credit Crisis - How Much Blame is the Borrower's?

Well, as this mortgage and credit crisis plays out, we hear all kinds of explanations as to who is to blame, what solutions and actions must be taken, the risks of both action and inaction, etc. But one question to focus on is, 'Are the borrowers to blame?'

Some say not at all, some say they are to some extent, and others lay nearly all the blame on the borrowers. It's important to look at this question, because this can affect so many of us, even if we never borrowed a dime and never carry credit card debt. If nothing else, it does provide a lesson or two to those of us who are contemplating buying a home.

In my humble opinion, the borrowers do share some blame, but only some. If the borrowers had been approached by shady men in trenchcoats who said, something like, 'Pssst! Come here! I've got a loan for you, and you can get into that house you wanted! Just sign here, pal!', most would have run away and we wouldn't be in this mess.

But, this is not the case. Back in the 1970's, as I've learned, lenders were made by law to give loans to people who were bad risks, so as to increase home ownership. So, when people went to get loans for mortgages, they were told that they did qualify. And since these were either government agencies, or banks and lending institutions working with the government, the borrowers thought that they were fine. And despite distrust of government, mortgages was one area that didn't see too many big scandals. So, the borrowers felt that they were dealing with trustworthy lenders, and it's easy to understand this, as there are degrees of trust, depending on who we're dealing with.

Add to this, the fact that housing values seemed to go up and up, and up, so the longer you made your mortgage payments, the less danger of default, as you could conceivably get enough money to pay off the mortgage and have a lot left over, if you did need to sell. And it was easy to sell. By 2003 or so, in some areas, people were outbidding each other for homes while the sellers just sat back in awe at how much they were getting beyond their asking price. Now, houses regularly spend weeks, and months without offers, even when the price has been lowered.

So, the 'greed' factor was also in play.

So, on what points are the borrowers to blame?

1. Not doing their own research into how much they could really afford. The amount of money needed to buy a home and to make the payments is so large that one must do their own homework on this, no matter how trustworthy the lender and other people they're dealing with are. They must also figure in the 'support' a home needs, such as maintenance, insurance, taxes, and if there's an HOA, then dues as well. And only the borrower truly knows his or her own financial situation. After all, no credit report that the lender sees, will tell them about extraneous expenses such as how many times the borrower eats out or what clubs and organizations the borrower may be paying dues for.
2. Believing in the 'inevitability' that homes will appreciate greatly for ever. It's been said that Hillary Clinton's campaign was defeated by this attitude within her campaign, as people in the campaign believed she could not lose. So, too, many, myself included, though I never bought a home, believed that prices would forever go up, barring a great worldwide population reducing calamity. But, as they say in the investing world, 'Past performance is no guarantee of future performance.'

So, borrowers trusted, but did not verify, and believed too much that their investment was a sure thing and would be forever. But, when one looks closer, one can see that they were indeed given reason to believe falsly.

And it serves to remind all of us, to not accept the word that we 'can do it' financially, unless it comes from us, after we've checked our own financial houses ourselves.

As to the bailout? Like many, I'm furious about it, and I don't know if it's the right thing to do, or if nothing should be done, or if there are alternatives. But I do lean toward some of the solutions that Newt Gingrich and Mike Huckabee have put forward, involving changing the overall mark to market strategy, and 'insuring' rather than 'buying' the bad debt. Now, I'm no economic expert, and I certainly don't know what exactly 'mark to market' means, but I do know that taxpayers should not bear the burden of cleaning up the mess in any way, as they did not, unless they're involved as a borrower, lender or policymaker, create the mess to begin with.

All I know is that my portfolio has gone down by 20% in the last month. I pay my credit balances in full each month, and carry no running debt. And I fear the worst is yet to come, but I hope I'm wrong.

Thanks for reading and please feel free to comment!

Alan S.