Who's to Blame? Homeowners
Each day for five days, a different writer from TheStreet.com will make the case for why one of five prime culprits—the banks, Congress, irresponsible home buyers, the Federal Reserve or the rating agencies—is most to blame for the credit crisis and ensuing economic meltdown.
It's tough to wag a finger at those in pursuit of the American Dream: The big house and the white picket fence to call your own.
Yet it flies in the face of reason that someone who earns $50,000 a year could actually believe they could afford to make payments on a $650,000 home. It's a very simple point, a concept that should be easily grasped. Even Saturday Night Live gets it , evidenced by their great skit with a simple instruction: "Don't buy stuff."
But as Paul Nolte, director of investments with Hinsdale Associates, points out, the reckless assumption that housing prices would always rise has brought us to the precipice the economy currently rests on, in danger of falling over.
"The borrowers thought they were getting something for nothing," Nolte said. "They could lever it up because housing prices have always gone up. As it was with the tech bubble, when everyone thought tech was safe, it's the same thing in the housing market. Investors were not conservative in the housing area, just as they weren't conservative in technology in the early 2000s."
Not every borrower is to blame for where the stock market and the economy are now. Some responsible homeowners have always lived well within their means, but a layoff in the household or some other tragedy turned into the tipping point that drove many into foreclosure. These specific cases require some understanding and compassion.
Beyond that, it's tough to find sympathy for unscrupulous borrowers that, simply put, should have known better. There are several types of irresponsible borrowers that need be held accountable: Buyers who took out a mortgage they could never afford, buyers who tried to ride the housing wave without educating themselves well enough, buyers who committed fraud in hopes of netting a quick profit, and buyers who attempted to flip more homes than they ever could manage.
"From my perspective, a lot of borrowers were worried about getting a house today, not worried that down the line the markets wouldn't turn into what they are today," Nolte said. "It's a lack of forethought as to what might happen and not playing things conservatively. What if interest rates rise? What if housing prices don't go up?"
There are plenty of excuses irresponsible borrowers can make. Predatory lenders waived through applications and pressured potential buyers into taking on more debt than they could handle. Wall Street banks like Citigroup (Stock Quote: C), Goldman Sachs (Stock Quote: GS) and Morgan Stanley (Stock Quote: MS) were hungry for complex securities—which sliced mortgages into a thousand little pieces—to offer to hedge funds to trade. Advertisements told America how great it would be if you let your home pay for your vacation. Even the buying and selling of multiple houses for a profit was glorified in television shows like Flip This House and Flipping Out.
But let's be honest. No one forced a borrower's hand to sign the dotted line. Considering that a home is almost always the largest purchase a person will ever make in their life, buyers should have been well aware of the risk they were taking. Enough with the excuses. For every irresponsible lender, there was an irresponsible borrower.
The math it takes to add up your monthly expenses is not hard. It's simple addition, something a child could handle. Either you earn enough to pay your monthly bills or you don't. Everyone who borrowed more than they should have for a home should have known he or she was taking a massive risk, and many turned a blind eye to all of the details and implications.
