Making sure that people learn from the mistakes that they and others have made is the best way to avoid seeing problems repeat in the future. Unfortunately, despite the trillions of dollars that the U.S. spent in dealing with the aftermath of the mortgage meltdown, it appears increasingly likely that those who fell prey to the traps that brought on the housing-market crash and eventually the financial crisis aren't any better prepared to avoid those traps in the future.
You vs. your lender
At the risk of oversimplifying the cause of the housing boom and subsequent bust, what happened during the decade of the 2000s essentially boils down to a simple sequence of events. The wealth effect from big gains in the 1990s helped drive home prices up substantially during that decade, leaving homes less affordable for those who were trying to buy. In response, banks came up with increasingly innovative yet dangerous mortgage products to help more potential homebuyers qualify for loans and purchase homes, thereby boosting demand even more. As low-down-payment loans gave way to no-down-payment loans and standard 30-year amortized mortgages yields gave way first to interest-only loans and then to negative-amortization mortgages, banks and borrowers both pushed the envelope to the breaking point. When interest rates stopped cooperating and speculative activity in the housing market reached a critical point, the bottom fell out of the market, first in the low-quality subprime arena and then spreading to higher-quality borrowers as well.
In the aftermath, we've seen exactly what lengths banks went to in order to get borrowers into homes. Legal battles over issues like the robo-signing scandal have led to settlements of billions of dollars against Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), and a host of other major mortgage lenders who bent the rules both before and after the housing bubble burst. The near-failure of Fannie Mae and Freddie Mac show the extent to which big banks set up transaction-oriented business models that valued loan volume over loan quality. Moreover, Bank of America's recent settlement with mortgage-insurance company MBIA (NYSE:MBI) in part validates allegations of banks' misrepresenting compliance with mortgage-loan standards, albeit without formally admitting responsibility.
New regulations have focused on protecting mortgage borrowers from predatory practices. But all the regulation in the world won't protect people who haven't taken steps to learn the rules on their own, and thus far, prospective homeowners are failing miserably.
What people don't know
To get a sense of just how little homeowners have learned from the mortgage crisis, take a look at these survey results from Zillow:
- More than a quarter of all homebuyers mistakenly believe that once they're preapproved for a mortgage loan at a particular bank, they have to use that bank for their mortgage.
- Nearly as many think that they don't need to shop around for lower mortgage rates because their existing bank will always give them the best rates available.
- A third of buyers erroneously think that federal law protects them by setting fixed guidelines for fees that banks can impose for closing costs, such as appraisals, credit reports, and other mortgage-related charges.
- A third of buyers don't even know what a mortgage's APR is, let alone why it's important in being able to compare mortgages from different lenders.
With banks working so hard to restore their pre-crisis profits, prospective homebuyers who don't have even this basic knowledge stand little chance of fending off aggressive mortgage-loan salespeople whose compensation is directly tied to the volume of mortgages they're able to process.
The next threat
What will cause the next mortgage crisis is far from certain at this point. Interest rate rises will affect some people, although low fixed rates have gotten most homeowners away from the adjustable-rate mortgages that caused so much trouble during the 2000s. What's more likely is a renewed uptick in home prices, again challenging affordability and again forcing people to stretch to buy homes.
Whatever the situation, though, it's crucial that people understand what they're getting into before they take on the biggest financial commitment in their lives. Otherwise, it'll just be a matter of time before the next big mortgage crisis comes about.