By now, we’ve all heard about the shameful efforts by Bank of America and one-time mortgage lender Countrywide Financial. Loans were made to those who could not afford them and how these loans played a significant role in both the mortgage meltdown and the recession that soon followed. And of course, most of us know by now, too, the massive $1 billion lawsuit filed against Bank of America this week by the U.S. Government. What you might not know, however, is who the folks were signing on the dotted line.
One agency recently conducted a survey and subsequent report and what it uncovered might surprise you. Turns out, most of those who took on “unmanageable debt” prior to the recession beginning in 2008 were highly educated. Not only that, but the report also says,
Gross personal financial mismanagement occurred across the population and not just in the mortgage market and not just among the unsophisticated.
The study focused mostly on those mortgage payments that equaled or surpassed 40% of the homeowner’s annual income. This is historically when defaults or bankruptcies begin occurring and usually when the unexpected happens. Those unexpected events might be a drop in income via job loss, a medical emergency, death, divorce or other life altering events. The vast majority of those taking on that kind of mortgage debt earned significantly more than above average incomes. Not only that, but in 2008, the number of Americans who fell into this category jumped by a whopping 10% between 1992 and 2008. In 1992, the number living these risky lives was at 17%; by 2008, just before the recession kicked in and the mortgages began plummeting, that number had risen to 27%.
Make no mistake, though, this doesn’t lessen the responsibility of the banks and mortgage lenders. Many of them – and most who have not yet seen and likely never will see the inside of a jail – were well aware of what they were doing and the likely repercussions of allowing many of these mortgages to go forward. The underwriters knew as did the CEOs. This latest lawsuit against Bank of America highlights those facts. The bank has been accused of everything from removing underwriters from the cycle and having inexperienced employees take over the approval process to awarding employees who were able to churn out record numbers of approvals. The government insists it is prepared to move forward with this lawsuit and has the necessary proof to prove its case. The government also alleges the program was “intentionally designed to process loans at high speed and without quality checkpoints, and generated thousands of fraudulent and otherwise defective residential mortgage loans.”
Those who said they were most optimistic in 2008 were also the ones who were likely already living with debt they could not manage. The report reads,
People who piled on debt may have been too optimistic about their economic future, but you can’t blame that on a lack of education. People with college educations may have thought they were immune to any economic problems.
And it went far beyond mortgages they could not afford. Those with credit card debt that was overwhelming was high and those who were renting their homes also struggled then and now with “unmanageable debt”. In fact, one in three renters fell into this category while one in five homeowners found themselves in similar situations. Still, heavy debt increased across the board; it’s just those with more disposable income were struggling more during that particular time frame, whether they owned or rented their homes. The report also said, “The percentage of renters who piled on debt… was surprising” and then went on to say the financial crisis went far and beyond the housing sector, “There was too much debt, really, in all parts of the economy”.
While there were a lot of homeowners who acted in good faith, there were many who knew they were getting into mortgages they couldn’t afford. Many discovered they were able to get approved via “stated” loans. A stated loan means the applicant states his income, assets and current debt load with no verification on the part of the lender. Loan officers weren’t pushing for any kind of verification if the actual underwriters weren’t requiring it – and many weren’t. These stated loan products are likely the root of much of the mortgage meltdown. Not only that, but often, during loan closings, the applicants were coming in, signing the papers in a hurry and title attorneys weren’t encouraging them to sit down, take their time and carefully review the loan documents. Many had no idea the differences between appraised values on the homes they were buying and how that played a role in the equity they would soon be building. These consumers have a responsibility to their families; yet, many rushed into it and then maxed out credit cards on new furniture, flooring and window treatments. As one of the authors’ of the report said,
Financial ignorance afflicts all classes and leaves us vulnerable to another financial crisis at any time.
Were you surprised by the findings of the report? Share your thoughts with us.