At some institutions, loans of this type were actually called “liar loans” by brokers, a reference to the obvious fudging of information they represented (Markels 2007).
A substantial portion (if not a large majority) of new home purchases during that time period involved a fraudulent practice of dishonestly inflating the income and financial health of prospective purchasers. In many instances, the real estate brokers and mortgage brokers precipitated this type of falsification of credit worthiness to facilitate high-commission-generating transactions. They stood to profit without any corresponding risk by virtue of the fact that any risk of default on the initial mortgage obligation would be shifted to other lenders and to investors in stocks connected to the value of mortgage securities on Wall Street (Lowenstein 2007). Even worse, during the process of loan negotiation, many homeowners were encouraged to inflate the appraised value of the property for the purposes of maximizing the long-term equity value they represented.
Partly as a result of the financial strain in the form of the protracted war in Iraq, the increase in national security spending after the attacks of September 11, 2001 and the increase in homeland security spending, as well as the weaker value of the dollar worldwide, and the high price of OPEC oil, the U.S. economy suffered tremendously in the first few years of the 21st century. Housing markets that had represented great potential dried up almost overnight, resulting in a drop in value of those properties.
By 2006, millions of American homeowners found themselves stuck with real estate whose value had diminished substantially. Compounding that problem, many of them had already borrowed additional money against the original value of their homes, leaving them with monthly payments that far exceeded their ability to repay responsibly.
Faced with the prospect of continuing to repay a loan that was based on the artificially high appraisal value of their homes at the time of purchase, many of those homeowners opted to simply walk away from their obligations, leaving their homes, losing any equity already invested, and destabilizing the mortgage securities that had repackaged their mortgage obligations into traded commodities on Wall Street (Markels 2007). This precipitated the collapse of several large lending institutions as well as the demise of Wall Street firms such as Bear Sterns in early 2008. This only compounded the instability of the American dollar worldwide and of Wall Street-traded stocks because it became immediately clear that the mortgage securities comprising thousands of individual mortgage obligations had been tremendously overvalued as low-risk investments when, in fact, they were extremely high risk.
Implementing Solutions for the Future Health of the American Economy:
In many respects, the current mortgage crisis represents only the culmination of the convergence of many elements that represent long-term problems with American cultural values and business practices. Tighter legislation is required to address predatory lending practices in general. Particularly with respect to loans to low-income producers, a cap is necessary to limit the maximum value of payments so that the extension of credit to the working poor no longer resemble the usurious practices (if not usurious rates) common to organized crime and loan sharking.
Likewise, harsher penalties for knowing misrepresentations of financial information are appropriate (and necessary) to balance the potential windfall benefit available to far removed lenders who no longer risk their own interests by facilitating fraudulent loans for unqualified buyers. The connection between fraudulent credit and loan practices and the overall health of the American economy, not to mention the havoc wreaked on the lives of consumer, justifies much more stringent regulation of the entire industry and its practices. Perhaps most of all, public education is required with respect to fundamental understanding of the implications of excessive reliance on long-term credit, particularly, when borrowed credit is used to finance unrealistically high lifestyles in comparison to actual earning potential.
Halbert, T., Ingulli, E. (2000) Law & Ethics in the Business Environment.
Cincinnati: West Legal Studies. Lowenstein, R. (2007) Subprime Time: How Did Home Ownership Become So Rickety? New York Times Magazine; Sept. 2/07. Retrieved July 8, 2008, from the New York Times online website, at http://www.nytimes.com/2007/09/02/magazine/02wwln-lede-t.html?_r=1&oref=slogin&pagewanted=print
Markels, a. (2007) Spring Fever: Just How Sick Is the Housing Market. U.S. News & World Report. Vol.142 No. 11 (33-36)
Markels, a.(2007) Yes, Housing Will get Worse. But How Bad?
U.S. News & World Report. Vol.143 No. 7 (46-48)