What is the role of housing education and counseling in the future housing economy and finance system?
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There is no doubt that a major contributor to the financial meltdown that decimated the housing industry was the introduction of subprime mortgages. Less clear is the real culprit responsible. Was the broker who wrote the mortgage application more guilty than the lender who funded the loan? Both earned fees. Was the appraiser guilty of irrational exuberance? Or was it people who took out loans they knew they could not repay? In reality, it was a combination of events compounded by a lack of training, education and understanding by all those involved.
First to blame are the politicians who passed legislation without comprehending the consequences of their actions. When the Community Reinvestment Act was passed in 1977, ostensibly to outlaw “red-lining” by local banks, it made housing a “right” and not a privilege. Once that Rubicon was crossed, lending standards were forced downward to accommodate borrowers who; had no cash (zero down loans), had poor credit (subprime loans), whose income could not support a loan (low teaser rates) and those who had no job and no credit and no down payment (no document loan). The politicians put into place legislation that enabled homeownership but removed the criteria to “deserve” homeownership that built the American middle class. People who could not afford a home became homeowners.
Wall Street and its financiers became greedy and forgot the basic rules of lending. With homes appreciating 20% per year and Fannie Mae and Freddie Mac buying every mortgage the financial community could write, Wall Street was unable to ignore this pot of gold. They bundled and packaged and sold mortgage back securities with high credit ratings to global investors hungry for yield. Wall Street knew the mortgage insurance could never withstand a downturn and some unscrupulous houses even shorted the very securities they sold.
Would better housing education and counseling have avoided the financial meltdown of 2007-2008? The answer is no. The problem was not limited to just subprime borrowers or one group of people. The problems of this downturn were systemic and ranged from politicians like Congressman Barney Frank and mortgage brokers at Countrywide to the poorest borrower in South Central Los Angeles. However, now that we have experienced the extent of the downturn, and the decimation of businesses and families alike, to not introduce focused housing education and counseling would condemn future generations to repeat history.
Robert J. Cristiano, PhD is the Real Estate Professional in Residence at Chapman University; a Senior Fellow at The Pacific Research Institute; and President of L88 Investments LLC.
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