sported thirteen credit or charge cards and carried $7,500 in credit-card balances, up from $3,000 a decade earlier. 3
Americans borrowed more in part because there was more money to borrow. Thanks to Wall Street’s 1977 invention of “securitization,” or the bundling of loans into debt securities, lenders could sell their loans to investors, take the proceeds, and use them to make even more loans to consumers and companies alike. Thousands of loans ended up in these debt securities. So if a few of them went sour, it might have only a minor effect on investors who bought the securities, so the thinking went.
The shift in attitude toward debt gave life to the real estate market.More than most nations, the United States worked at getting as many people in their own homes as possible. Academic data demonstrated that private-home ownership brought all kinds of positive benefits to neighborhoods, such as reduced crime and rising academic achievements. The government made the interest on mortgage payments tax deductible, and pressure on Congress from vested interests in the real estate business kept it that way; other benefits doled out to home sellers and buyers became equally sacred cows.
Low-income consumers and those with poor credit histories who once had difficulty borrowing money found it easier, even before Alan Greenspan and the Federal Reserve started slashing interest rates. In 2000, more than $160 billion of mortgage loans were outstanding to “subprime” borrowers, a euphemistic phrase invented by lenders to describe those with credit below the top “prime” grade. That figure represented more than 11 percent of all mortgages, up from just 4 percent in 1993, according to the Mortgage Bankers Association.
Low borrower rates helped send home prices higher after the 2001 attacks. Until 2003, the climb in prices made a good deal of sense, given that the economy was resilient, immigration strong, unemployment low, and tracts of land for development increasingly limited.
Then things went overboard, as America’s raging love affair with the home turned unhealthy. Those on the left and right of the political spectrum have their favorite targets of blame for the mess, as if it was a traditional Whodunit. But like a modern version of Agatha Christie’s
Murder on the Orient Express
, guilt for the most painful economic collapse of modern times is shared by a long cast of sometimes unsavory characters. Ample amounts of chicanery, collusion, naiveté, downright stupidity, and old-fashioned greed compounded the damage.
A S HOME PRICES SURGED , banks and mortgage-finance companies, enjoying historic growth and eager for new profits, felt comfortable dropping their standards, lending more money on easier terms to higher-risk borrowers. If they ran into problems, a refinancing could always lower their mortgage rate, lenders figured.
After 2001, lenders competed to introduce an array of aggressive loans, as if they were rolling out an all-you-can-eat buffet to a casino full of hungry gamblers. There were interest-only loans for those who wanted to pay only the interest portion of a loan and push off principal payments. Ever-popular adjustable-rate mortgages featured superslim teaser rates that eventually rose. Piggyback loans provided financing to those who couldn’t come up with a down payment.
Borrowers hungry for riskier fare could find mortgages requiring no down payments at all, or loans that were 25 percent larger than the cost of their home itself, providing extra cash for a deserved vacation at the end of the difficult home-bidding process. “Liar loans” were based on stated income, not stuffy pay stubs or bank statements, while “ninja” loans were for those with no income, no job, and no assets. Feel like skipping a monthly payment? Just use a “payment-option” mortgage.
By 2005, 24 percent of all mortgages were done without any down payments at all, up from 3 percent in 2001. More than 40 percent of
Americans borrowed more in part because there was more money to borrow. Thanks to Wall Street’s 1977 invention of “securitization,” or the bundling of loans into debt securities, lenders could sell their loans to investors, take the proceeds, and use them to make even more loans to consumers and companies alike. Thousands of loans ended up in these debt securities. So if a few of them went sour, it might have only a minor effect on investors who bought the securities, so the thinking went.
The shift in attitude toward debt gave life to the real estate market.More than most nations, the United States worked at getting as many people in their own homes as possible. Academic data demonstrated that private-home ownership brought all kinds of positive benefits to neighborhoods, such as reduced crime and rising academic achievements. The government made the interest on mortgage payments tax deductible, and pressure on Congress from vested interests in the real estate business kept it that way; other benefits doled out to home sellers and buyers became equally sacred cows.
Low-income consumers and those with poor credit histories who once had difficulty borrowing money found it easier, even before Alan Greenspan and the Federal Reserve started slashing interest rates. In 2000, more than $160 billion of mortgage loans were outstanding to “subprime” borrowers, a euphemistic phrase invented by lenders to describe those with credit below the top “prime” grade. That figure represented more than 11 percent of all mortgages, up from just 4 percent in 1993, according to the Mortgage Bankers Association.
Low borrower rates helped send home prices higher after the 2001 attacks. Until 2003, the climb in prices made a good deal of sense, given that the economy was resilient, immigration strong, unemployment low, and tracts of land for development increasingly limited.
Then things went overboard, as America’s raging love affair with the home turned unhealthy. Those on the left and right of the political spectrum have their favorite targets of blame for the mess, as if it was a traditional Whodunit. But like a modern version of Agatha Christie’s
Murder on the Orient Express
, guilt for the most painful economic collapse of modern times is shared by a long cast of sometimes unsavory characters. Ample amounts of chicanery, collusion, naiveté, downright stupidity, and old-fashioned greed compounded the damage.
A S HOME PRICES SURGED , banks and mortgage-finance companies, enjoying historic growth and eager for new profits, felt comfortable dropping their standards, lending more money on easier terms to higher-risk borrowers. If they ran into problems, a refinancing could always lower their mortgage rate, lenders figured.
After 2001, lenders competed to introduce an array of aggressive loans, as if they were rolling out an all-you-can-eat buffet to a casino full of hungry gamblers. There were interest-only loans for those who wanted to pay only the interest portion of a loan and push off principal payments. Ever-popular adjustable-rate mortgages featured superslim teaser rates that eventually rose. Piggyback loans provided financing to those who couldn’t come up with a down payment.
Borrowers hungry for riskier fare could find mortgages requiring no down payments at all, or loans that were 25 percent larger than the cost of their home itself, providing extra cash for a deserved vacation at the end of the difficult home-bidding process. “Liar loans” were based on stated income, not stuffy pay stubs or bank statements, while “ninja” loans were for those with no income, no job, and no assets. Feel like skipping a monthly payment? Just use a “payment-option” mortgage.
By 2005, 24 percent of all mortgages were done without any down payments at all, up from 3 percent in 2001. More than 40 percent of
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