Although I should be doing my taxes, I’m taking a brief moment to post about the mortgage crisis.
An article in the local Sunday paper reported on the decline in the local real estate market and how prices have dropped significantly in most of the county. (As an aside, the adjacent metro area has the highest foreclosure rate in the nation.) The article profiled a local guy who had not been able to afford buying a house several months ago, but who recently purchased a home for approximately $200,000. The house, originally listed for $289,000, was on the market for several months. The purchaser was thrilled to have gotten his deal and his mortgage. His lender only required a $600 downpayment.
HELLO? Why aren’t lending requirements tighter? Why is a lender allowing a 0.3% deposit in today’s credit market? Whatever happened to 20%, 10%, or even 5% deposit requirements? Won’t this buyer be another foreclosure statistic in a few years? This is insane. In today’s real estate market, lenders should require more substantial deposit and should tighten lending requirements. If banks continue such lax lending practices, they’re going to continue going out of business.
Just this morning, I heard on NPR that Wachovia, the second largest bank in the USA, reports a huge first quarter loss. Why? Because of their ill-timed purchase last year of Golden West Financial, the largest sub-prime lender in California. From today’s New York Times:
The deal gave Wachovia a foothold in the fast-growing California market. Executives played down the risks at the time, but many Wall Street analysts and investors questioned the logic of the bank increasing its exposure to a buoyant market as the housing boom appeared to peak.
The bank has continued to take a beating, especially in California. Bank executives have been caught off guard by the number of borrowers walking away from their homes after falling behind on payments. Other parts of the bank’s portfolio have been hit similarly hard: losses tied to auto, credit card and home equity loans have risen sharply over the last few months.
Wachovia also faces pressure in its capital markets business, where it was a big packager of mortgage-related loans and provider of corporate buyout loans. Analysts say the bank could be in store for bigger losses tied to commercial real estate, where it has about $12 billion of exposure to construction loans.
So, I ask again: in a world where consumers can’t pay their credit card bills, their auto loans, and their mortgages, why are lending institutions still so lax about extending credit?