> In the subprime crisis 10 million American families lost their homes
When you say "lost their homes", do you mean "I owned the house and somehow I now own no house and have no money for it, it just evaporated", or do you mean "I took a loan I could not afford, on a house I could not afford, while investing a tiny amount of money or none at all into the deal, and hoping to profit from ever increasing prices, and using my equity as an infinite-money ATM, and when that stopped, the bank took the house back"? If the latter, then what was lost is not "homes" but unrealistic prospects of profits from the thin air. If the former, I'd like to know how exactly a subprime crisis could cause something like that.
That is a very broad and angry brush you're painting with.
There were plenty of people that bought houses at reasonable prices and down-payments and still lost their ass when downstream ramifications took out unrelated businessss.
I don't doubt that, I just think when throwing around million-sized numbers it is necessary to be aware that these numbers are not describing one case, they describe a lot of different cases. There were a lot of people that were hurt by the subprime fallout (myself included, though I did not lose a home because I could not afford one at the time anyway) and also a lot of people engaging in absolutely reckless speculation (which also was one of the reasons why I was not able to afford a home at the time). There's more than one side to that picture, and some of the people who gut hurt were also the people who made it possible to get that crazy in the first place.
I don't share your doubts. Even people not directly exposed to the bubble may be indirectly exposed by way of funds they've invested in or retirement accounts, or even just by having invested in something that invested in something that may evaporate with the bubble. Not to mention jobs that may disappear, which will result in the people who held those jobs being less able to spend their money, which has knock-on effects in the rest of the economy if it happens at large enough scale.
At the time most of those people took out those loans on those houses, they could afford them. Several things happened in various combinations. Interest rates shot up making the loans unaffordable. House prices collapsed so now they had taken out loans on houses worth dramatically less than they bought them for. They lost their job.
In some cases they lost their job meaning they needed to move to find work, but that would mean selling a house worth less than they bought it for which mans they'd owe the difference, and the mortgage on the new house would be unaffordable anyway due to the increase in mortgage rates.
Then bear in mind the hyper aggressive marketing tactics, and assurances from financial institutions and politicians that this was all fine and there was no risk.
Ultimately though, this has nothing at all to do with my comment. I meant "they lost their homes" and that's all. I didn't assign any blame to anyone, nor did I try to accuse anyone of anything, all I talked about was the potential economic repercussions.
You are kind of on to something in that people had loans they shouldn't have gotten in the first place. But as with many things of this nature, the casualties were all over the place. The labor market turned to shit, just as prices crashed and interest rates went up. People who paid faithfully and thought they had equity were shocked to find they were underwater in months. That's one HUGE down side of low down payments: it doesn't take much for a price swing to wipe out all your equity and leave you in a no-win situation when it comes to selling your house. Down payments ought to be at least 20% of the price of the house, to discourage people from taking out bad loans or walking away from them. The government should not subsidize mortgage credit or fix interest rates in any way.
Didn't a lot of people lose their houses because they bought a house with a mortgage payment they could absolutely afford with their income, and then got laid off when the economy contracted?
And, frankly, it's literally the bank's job not to make loans that people will default on too frequently (for their own sake), so if you're not exceptionally knowledgeable about banking, it's not unreasonable to trust your bank and their advisors not to make a loan you won't be able to pay back. Like, sure, you shouldn't trust them not to screw you on the terms and with interest, but banks mostly are trying to make loans they expect to get paid back, and I would personally expect them to have a good idea of how much they can trust me with.
> And, frankly, it's literally the bank's job not to make loans that people will default on too frequently
It's not the bank's job though to decide whether it's ok for you to treat the house as a long-term asset which consumes a part of your cash flow, or as a speculative gamble. You can find a bank that will support either, but it's on you to decide which road to take. And if somebody takes the speculative road and loses, then it's not exactly the banks' fault. The adult should take responsibility for their own actions.
> it's not unreasonable to trust your bank and their advisors not to make a loan you won't be able to pay back.
No, it's not reasonable at all. Loan officers do not have a fiduciary duty towards you. They have a fiduciary duty towards the bank, so that's what they worry about - to take care of bank's interests. Assuming those interests would always align with yours is a dangerous naiveté. There are financial advisors who are fiduciaries - and you can hire one if you need - but you won't find them in your mortage bank's loan office. Yes, the bank is interested, in most cases, not to produce overtly bad loans - but that doesn't mean they care how you are going to pay it, and there's a lot of chance they'd sell your loan to another servicer in a year or two anyway. They have no duty to figure out if taking this loan won't harm you, that's your duty.
Agree with 95% of this. The only slight tweak id make is that the banks did err in assuming the value of the homes being used as collateral could not tank. Setting aside for a moment the reality of pretty rapid sales of the note to another entity, in general, it shouldn’t matter very much to the bank if you’re able to pay the loan back, assuming that their predictions are correct about the value of the home, and assuming as well that you don’t physically destroy it. Either they get their money or they get to sell the house and get their money.
Uh... neither. The former is wrong, because as you point out the housing supply isn't a matter of finance. People have homes.
But your respin is kind of a whopper too. While there were absolutely people cynically leveraging real estate to make a buck, the overwhelming majority of foreclosures in the wake of the '08 crisis were just regular homeowners. They needed a home (maybe they moved, or got married, grew up, downsized, etc... people need homes!). So they called a real estate agent and a bank to figure out what they could get, and everyone told them (correctly) that they could get a great home at a very reasonable price with very little down payment. Because everyone else was doing it. So they did.
Insert the comment everyone’s mom says about peer pressure: “if everybody else was jumping off a cliff, would you jump too?”
Everyone who took an adjustable loan, interest only loan, etc., who didn’t have an exit strategy already in place in case of inability to refinance, had themselves to blame, regardless of whether “everyone was doing it.“ I don’t mean any criticism toward people who happened to lose their jobs and would’ve otherwise been able to continue paying on the loans they’d taken. Nor am I saying it’s OK to take advantage of people who don’t bother to read or understand the assumptions inherent in the contracts that they’re signing. But people were incredibly naïve if they accepted some broker’s verbal assertion that they’ll always be able to refinance the otherwise-unaffordable house on favorable terms in 3 or 5 years or whatever.
> Everyone who took an adjustable loan, interest only loan, etc., who didn’t have an exit strategy already in place in case of inability to refinance, had themselves to blame
Come on. Median homeowners (even median HN commenters) are hard put to even define those terms, much less execute your strategy correctly. This kind of blame-the-dummies caveat emptor absolutism fails in the modern world. It's like demanding people decide on their own medical diagnoses and select treatments from a menu.
We license realtors and banks, regulate mortgage marketing and have a CFPB for a reason.
I said it wasn't okay to take advantage of the so-called 'dummies.' But I think you're going too far to say they don't also have responsibility. That basically says they have no agency and are just passive NPCs.
Also, I think you're underestimating the intelligence of the median person. If a doctor tells me that for $500, they can surgically implant a chip in me that will give me LeBron James-level basketball skills in 3 years, and I say "Cool, cut me open, Doc!" I am partly to blame because I should have known that isn't possible. Yes, the doctor should still be punished. But people should get multiple opinions for facts so obviously too good to be true and only commit to something when they understand the risks.
> give me LeBron James-level basketball skills in 3 years
That doesn't seem like a good faith analog for "I got a 3.2% mortgage with 5% down and payments less than my last rental".
You keep pretending that the idea that the real estate market was internally overleveraged by repackaged derivatives held by investment banks was some kind of obvious thing that regular homeowners were too stupid to see. And I'm telling you it wasn't, because no one saw it, not even the bankers and regulators, until it was too late. Blaming the homeowners for not "understanding the risks" is unfair, but also frankly non-actionable. They'll never be as smart as you want them to be in hindsight, because no one is.
for 3 or 5 years though. That's part of the terms. Nothing outside of that was promised to them on paper.
It's reasonable to expect someone looking at a 5/1 ARM or an 'Interest only for X years' loan to ask "What can I be guaranteed in writing will happen at the end of that period?" The right answer was "Nothing. Interest rates have historically moved between 3% and 22%. Your new payment could be 4x your old rent, or it could get even cheaper. The value of the home could go up or it could go down. By taking this loan you are betting your house, the down payment, and your credit rating on not just one but multiple assumptions: Low rates and continuing appreciation."
That's setting aside the systemic risks that I agree nobody not in the financial world ought to have been expected to understand.
The structure of the derivatives market is not obvious. The idea that home prices will always rise at the present level and you can just pay "less than my last rental" for a new house because handwave should give one a pause.
> And I'm telling you it wasn't, because no one saw it, not even the bankers and regulators, until it was too late
That's not true. A lot of people called it unsustainable at the time. A lot of people said there's a bubble. They were laughed at and shouted down, as doomsayers that are just to much of a buzzkill to let people just enjoy a new cheap house. A lot of people didn't buy into the bubble, because they correctly deduced it's not worth it. You don't hear about them for the same reason why the newspapers don't report there wasn't a murder - there's nothing to report. So you hear the stories of those who chose wrong and got hurt - because there's something to report there. But if a responsible family sees a loan too good to be true on a house they can't afford and walks away - you'd never know about it. But they exist. And there should be more of them.
> They were laughed at and shouted down, as doomsayers
That's a fallacy. With billions of humans, given any doom, someone was there to sling it. Because there is always someone slinging doom. You can't listen to all the doomslinging, because to first approximation it's all wrong.
The truth is we'll never know whether the doomslinging cranks were just cranks or geniuses. But the fact that they haven't gone on to further heights of analytical magic tells me they were probably just lucky cranks.
It's the same reason that every four years we learn about a douglas squirrel or whatever that has predicted the last 14 presidential elections. Because we don't hear about all the critters that didn't.
True, some of it just random. But some is not. There were reasons why that boom was unsustainable, and they weren't hidden. One can argue nobody knew how and when exactly the break will happen - maybe now, maybe in a week, maybe in 5 years - but it's not possible that everybody gets 0% no doc loans on any house and it continues forever. To figure out the intricacies of why it happened and how it broke, you need a lot of knowledge. To know it's not normal and there would be a point where it has to change - you don't need that much, and many people did. Discounting them as random cranks is not right.
> the overwhelming majority of foreclosures in the wake of the '08 crisis were just regular homeowners
Yes and no. Yes they were regular homeowners, but they also massively overbid on homes they couldn't afford because it doesn't matter, we'll refinance under new valuation in a couple of years and will only profit from it! And by overbidding, they made the situation worse for more careful buyers, and helped to feed the frenzy. They are not the sole guilty party, there is a lot of guilt to go around, but part of the guilt lies on people who entered into bad deals because they were sure home prices never go down ever, and it doesn't matter how bad the deal is. I've been on a number of realtor presentations at the time that explicitly said things like that. And people bought into it massively. And yes, "everybody else" (well, not literally everybody, but a lot of people) did it.
That's exactly my point. It's still wrong what they did, and if they exercised more restraint and foresight, and less greed, maybe the size of the problem would be less, and less people would be hurt. I lived through it, and I had those doubts also - should I do what "everybody else" is doing? Should I participate in a clearly unsustainable bubble? Am I an idiot to not jump in at the chance of literally free money? Overwhelming majority faced the same questions, and a non-negligible part of them chose the irresponsible answer. And they got hurt. I feel for them. But I also do not forget it was their choice to make.
When you say "lost their homes", do you mean "I owned the house and somehow I now own no house and have no money for it, it just evaporated", or do you mean "I took a loan I could not afford, on a house I could not afford, while investing a tiny amount of money or none at all into the deal, and hoping to profit from ever increasing prices, and using my equity as an infinite-money ATM, and when that stopped, the bank took the house back"? If the latter, then what was lost is not "homes" but unrealistic prospects of profits from the thin air. If the former, I'd like to know how exactly a subprime crisis could cause something like that.