By Clayon Huggins
In 2005 when the housing market peaked, no one expected it to begin to fall the following year. In December 2008 the S&P/Case-Shiller Home Price Indices, which measure the residential housing market, reported the largest price drop in years since it started tracking this data.
“In short, what happened were re-securitized mortgages were bought by banks as investments. A good percentage of these mortgages were ‘ninja loans,’ so when the bubble burst, so did the banks,” said Neal Zephyrin, VP of Risk Management at a major French investment bank. Taking their name from products designed for those with “no income, no job or assets”, ninja loans were ripe for default.
Mr. Zephyrin suggests a nine-month moratorium on foreclosures for borrowers with recent lay-offs. He believes that mortgages for employed borrowers should be restructured, regardless of credit score, if the mortgage is underwater and payments are no more than 30 days past due.
With regards to avoiding a similar crisis in the future, Mr. Zephyrin offers that “There should be a real effort to continue to effectively regulate Wall Street and never again adopt the philosophy of ‘too big to fail’ and possibly bring back the Glass-Steagal Act.” This Act separated investment and commercial banking activities. It was enacted after the 1929 stock market crash, which many thought was a result of improper banking activities.
When the housing bubble burst, the damage spread quickly devastating our economy and unsettling markets all over the world. Eager to staunch the tide of foreclosures, president George W. Bush and chairman of the Federal Reserve, Ben Bernanke, announced a plan to help homeowners pay their mortgages. The problem with the bailout was that the money did not immediately go to homeowners.
What Bailout?
The first $350 billion that was given to Henry Paulson, former secretary of the Treasury, was turned over to the same banks whose reckless policies caused the market to fail.
“When the bailout occurred, those with variable rate mortgages that had not been delinquent, should have been switched into fixed rate mortgages and those with 30 year mortgages should have been extended to 40 or 50 year mortgages,” said a former analyst for JP Morgan. “This would have lowered their mortgage payments and increased their chances of keeping their homes, as well as, decreased the number of bad debts.”
Mortgages 101
When applying for a traditional mortgage, certain standards must be met. Typically, one must have two years of steady income, a down payment of 3-20% of the purchase price, good credit and monthly income that’s two to three times more than expected mortgage payments.
In the run up to the collapse, lenders qualified people who did not meet this criteria. They aggressively marketed “ninjas”, interest-only and adjustable rate mortgages. Fueled by skyrocketing home prices and a belief that values would only increase, many borrowed against the equity in their homes. Borrowers who never had the means to pay, or lost it as their loans adjusted, defaulted in droves.
