In the aftermath of the U.S. housing bust, one California woman recently sued her real estate agent for fraud, blaming him for getting her into a home with an inflated price. The woman claimed that other comparable homes in the area were selling for much less, but the agent concealed the information from her in order to collect a hefty commission on the higher sale price.
Unfortunately, this is not an exceptional tale from the now-past housing boom. With home prices appreciating at light speed in many areas of the country, greed took over for not only real estate agents, but homebuyers, speculators, mortgage lenders, home appraisers, and Wall Street investors. The traditional rules that guided the home-buying process were tossed out the window as people on all sides of the deal saw ways to get rich quick.
So whose fault is it? Who created the mortgage mess and is there still a place for ethics in the real estate market? The answer is varied and complicated, but two things are clear. One is that many different participants share the blame for the housing crash. The other is that the real estate scene can only properly function with the ethical cooperation of all involved.
Where does the guilt start? Let's begin with speculators. Several years ago, investors across the country started pouring money into homes in order to fix them up, rent them out, or sell them for greater profits. This led to a buying frenzy as people heard tales of the financial killing that was to be made from flipping houses. The result was an abundance of homebuyers. Homebuilders stepped up to the plate by overbuilding in many areas to capitalize on the housing frenzy.
As homes were being bought up after only minutes and hours of being on the market, the prices started to increase. Increased demand equals scarcity and higher prices, right? At that point average homebuyers started to have difficulty getting into the market as their incomes were not growing as quickly as were home prices. In order to get around this, many lied to their mortgage lenders, claiming higher salaries and greater assets.
Banks and mortgage lenders were willing to go along with the fraud because home prices were escalating so quickly that most buyers would be able to refinance or take out home equity loans with ease if they needed more cash to pay for the mortgage. Largely forgotten were the time-honored requirements of 20 percent down payments and good credit reports. Lenders created and pushed creative financing programs that included little or no down payments, risky adjustable interest rate plans, and plenty of no-income documentation loans.
Borrowers gobbled up these loans like crazy, barely pausing to read the fine print or find out how much they would be paying for their mortgage after the initial low interest period.
And of course real estate agents and housing appraisers got in on the act. They inflated appraisals to make more commission money and steered buyers into homes that were not worth as much as they were selling for.
Don't forget Wall Street. Investors across the country and the world invested billions into these risky loans because they seemed like a sure bet with the housing market on fire. With more investors, demand for these loans increased, causing many lenders to guide borrowers into exotic mortgages even when they were not a good fit.
The result is that millions of homeowners are facing high resetting interest rates and payments, hundreds and thousands of homes are in foreclosure and default, and the stock market has plummeted with the related losses.
Rebalancing has already begun in the real estate market with lenders reverting back to strict standards of good credit and large down payments. Borrowers now have to wait and save instead of diving into huge purchases and stock investors have started looking elsewhere for safer ventures. The process will likely take several years to complete and many have suffered and will suffer financial ruin in the mean time. Only ethical and wise behavior on the part of all involved can save the market from another devastating crash.
