This is what happened: Once upon a time, a mortgage was a long-term relationship between a bank and a home buyer where the bank made their money through decades of on-time payments. This meant that banks would encourage buyers to borrow only as much as they could afford. By the time Bush was in office, mortgages were no-longer seen as 15- or 30-year relationships between bank and buyer, but had become hot products where the banker made money at the point of sale. In a few years, the mortgage ‘approval’ process turned into an aggressive sales session. The end result was that consumers, walking into a bank hoping they would be approved for enough loan to buy the house they could afford, would encounter a mortgage seller looking to put them in as much debt as they were willing too take. So, if you thought you could only afford a $250,000 loan, the new kind of mortgage broker would try to put you into a loan for $350,000 on an adjustable rate, interest only for two years, throwing in a piggy back loan to get you past the down payment and making the whole thing possible with a little mortgage ‘insurance.’ An agents who sold a buyer too much debt did not care one bit because he or she made the commission at 9am, then dumped the the loan lock-stock-and-buyer into a secondary debt market the same day. The lender gets their check; the home buyer gets a letter saying their loan is now with a different company–somebody they’ve never met with only a P.O. Box somewhere in rural Iowa, and voila! Your mortgage is suddenly little more than credit card debt on steroids.
Suddenly, after two years of thinking that you had it made by paying only the interest payments on a loan you could never afford in the first place, the interest-only term of your loan expired and your $500/month payment suddenly kicked up to $1,500. Things get tight for a few months, there is additional stress in the family as you can no longer afford vacations or dining out. After a few months of that, the floodgates open. With the Fed threatening to raise rates, your lender decides to adjust your mortgage rate up by 3.5%–completely within their right to do. Unfortunately, this means your payments skyrocket up to $2,800 per month. Unprepared for this change and in disbelieve, you cover some short term expenses by maxing out two credit cards. You make the first mortgage payment and the second, but now you are short cash and start to miss one credit card payment, then another. Life at home becomes unbearably stressful and you start talking about a second job.
But while Bush’s terrorism fetish filled the country with fear, his ‘homeownership’ mantra had the opposite effect: duping vast sections of the country into the thinking they owned homes, when in reality all they had done is sign themselves up for mortgages so rigged in the banks favor that they make credit card contracts look like birthday cards. Any honest financial planner would have looked at 99% of these ‘sub-prime’ and adjustable mortgages against the financial realities of the new home buyers and given vastly different advice about loan amounts. Somehow the simple questions never got asked–questions like, ‘Are you sure you can handle this much debt over the next five years?’ or ‘Are you aware that these radical increases in your payments will likely happen in the next three years?’ or ‘Is it clear to you that housing prices at these levels cannot sustain themselves for more than 24 months, after which it is likely that prices will drop?’ Nobody pushing the ‘ownership society’ on America’s first-time home buyers seemed able to ask those questions at the time they needed to be asked–when the new buyer was poised to sign onto a loan that would inevitably set them on a course for total financial ruin in 3-5 years.
Nobody asked the right questions that would have resulted in a slow expanse of responsible home buying boom and lessened the number of wildly foolish mortgages that Americans took. And nobody asked those questions because the President of the United States was busy giving mortgage sellers plenty of cover by convincing the American public that they were becoming ‘homeowners’ rather than ‘debt buyers.’