Credit Crash: final thoughts

Ah well, I can't leave the credit crash discussion
alone without a final mention of poor Mr. Jack and Mrs. Jill, the taxpaying
citizens who are now left carrying the can of the debt-fuelled crash. 

With the banks being bailed out by the central
banks, Mr. Jack and Mrs. Jill are suffering.  Many of these poor folks
purchased properties based upon easy access to a loan, and are now being squeezed
by the credit institutions who want their money paid back, as the housing
market falls even faster than Colin Farrell's and Paris Hilton's underwear
combined.

Take poor Mrs. Ortiz for example.  Her story
was exposed in the Washington Post over the weekend.  In summary, it goes
like this:

Mrs. Ortiz works for a Best Western as a cook and
lived in a cramped apartment, so she decides to get into the housing market
boom in 2005 by buying a run-down duplex house for $430,000.  The mortgage
will cost them $3,000 a month but, what the hey, as her husband and her bring
in $4,200 a month they'll get by (?).

Now the home is in foreclosure, the mortgage
company and person who sold her the mortgage have gone out of business and
she's on her way to court.  What a shame.

Mind you, on the downside for Mrs. Ortiz, she:

• only looks at one house;
• doesn't look around the market and compare things;
• pays three times the price the house sold for only one year earlier;
• pays $5,000 more than the asking price at the time;
• doesn't speak English, but signs papers written in English that claim she is married to a man she doesn't know;
• didn't get any advice from anyone who would know what she was getting into; and
• was sold the policy by the woman next door who used to sell cosmetics and jewellery door-to-door.

According to the Center for
Responsible Lending, 40% of loans to Latin-Americans fall into the subprime
zone and they believe one in five will fall into foreclosure, probably for the
reasons above.

A similar issue was highlighted by the BBC's Panorama programme last year.  Mind you, this
has been going on for years.  For example, take this
report from 1999 on the BBC which states: "Lenders have been
criticised for imposing charges without having made clear to borrowers in
advance exactly what they would owe under conditions such as lock-in
clauses.  They have also come under fire for selling inappropriate
mortgages."

There's actually very little that's new in any of
this.  It's just basic human motivations. 

Q: Why did Mrs. Ortiz buy the house?
A: Because she wanted a nice house (and possibly thought she could make a
killing but got dumped on instead).

Q: Why did the cosmetics salewoman sell the house to someone she knew couldn't
afford it?
A: Because she thought she could make a killing (and did).

Q: Why did the mortgage firm provide a mortgage to a woman who couldn't afford
one?
A: Because they thought they could make a killing (and could offset the
risk).

Q: Why did the credit markets provide a vehicle to enable mortgage firms to
sell mortgages through rogue agents to people who couldn't afford them?
A: Because they thought they could make a killing (and did for many years
until liquidity dried up).

 

Who's at fault here really?
All of them.