When Banks Make Bad Choices

For years home prices did not increase substantially - the late '80's through the mid '90's was an example of this. However during the great bubble there were significant increases every year. I guess that helped people get into HELOC heaven. Here is a little excerpt from CNN's article Subprime Loans Failing Pre-Resets -

What's more, many borrowers started out with low- or no-down payment loans, which left them with almost no equity in their home.

During the boom, rapid price appreciation meant borrowers built up home equity quickly. That minimized defaults, since owners could draw from that equity to pay their bills - including their mortgages - through home equity loans.

What times they were - borrowing off your home to pay off your home. I can understand doing this in an emergency - such as health issues or career problems/transitions. What I can't understand doing this on a daily basis for every day living. Do people not realize they are in over their head.

Also what were the banks and mortgage companies thinking. there should have been some institutional memory that would discourage allowing people to perpetually have no or negative equity on their homes. While no one knew when the bubble would pop - all of the banking/finance/mortgage professions should have known that prices would not rise forever. Even if the bubble did not pop it would not continue rising at such a rapid pace. Once that happened people would fall behind and would be renting their homes from the bank.

And in case you were wondering if they banks did not realize what was coming -

By late 2006, lenders knew that the housing market was heading south. Foreclosure filings took off during the third quarter that year, up 43 percent from 12 months earlier, according to RealtyTrac, the online marketer of foreclosure properties. And home prices began to drop.

But instead of cutting back on risky loans, lenders kept lending. Why?

"Because investors continued to buy the loans," said Doug Duncan, chief economist of the Mortgage Bankers Association.

...Of course that's a bet that went bad. And it's likely to get worse as resets for ARMs issued in 2006 and 2007 kick in this year.

So it was not just the home buyers playing the system - the whole mortgage industry was in on it too.