Should I sell my home now — or wait?

What led up to the housing slump?
— Brandon D., Carey, Ohio

The simple answer is that housing prices got too high for too many people to afford. Most markets have a way of getting ahead of themselves from time to time; when that happens they have to “correct” — with prices falling — before they can get back to normal.

But sellers couldn’t have raised prices as fast as they did without buyers with lots of cash to spend. As economists and analysts sift through the debris of the housing bust, it seems clear that what we were all calling a “housing boom” was really a “lending boom.” With so much credit available to so many buyers, the competition for properties sent home prices soaring. 

So where did all the money come from? In the early 2000s, the Federal Reserve helped push interest rates lower to try to offset the lingering effects of the stock market crash and a mild recession. That meant that people who bought fixed-income investments like bonds were getting relatively low returns.

As a result, Wall Street fell in love with the higher returns it got from mortgages because bonds backed by pools of these loans — according to Wall Street’s computer models — came with relatively little extra risk over lower-yielding, safer bonds like U.S. Treasuries. Subprime loans, made to people with not-so-great credit scores, carried much higher interest rates. The thinking was that by bundling these loans together, the overall risk could be better managed.

So investors kept pushing money at lenders who (after taking their fee) pushed the money at mortgage brokers who (after pocketing commissions) convinced home buyers (mostly first-timers who trusted them) that they could afford a big enough loan to buy the house they wanted. The biggest fees went to the highest–cost mortgages that many borrowers are now having trouble paying.

All of that money hitting the system pushed home prices higher. In some cases, lenders and appraisers committed fraud by inflating the stated value of the properties. In other cases, lenders paid no attention to whether the borrower could afford the loan; they didn’t care because they quickly sold the mortgages to Wall Street which (after collecting another fee) chopped them up and sold them as bonds to investors

But it turned out the computer models were wrong: they didn’t count on fraud and a breakdown of lending oversight. Now that the initial “starter” rates on those loans are expiring, monthly payments are going up — in some cases a lot, and a lot more than borrowers were told. Some of those borrowers are not able to keep up. But in cases where, for example, payments adjusted to more than half a borrower’s monthly income, the mortgage brokers and lenders clearly had to know that the borrower couldn’t afford the loan after it reset.

Many readers find fault with these borrowers: There’s no doubt that some percentage were property “flippers” who got caught without a chair then the music stopped.

But, from what we're hearing from honest brokers and appraisers, regulators, foreclosure attorneys, community housing groups — and lots of reader mail — many borrowers were duped. These loans were very high cost — much higher rates than traditional ARMS, which go up and down. These only go up. Many were told “don’t worry, you can refinance before the payments reset higher” — which they can’t do now that house prices have fallen and they owe more than they own in equity. No reputable broker would have made that promise.

As one foreclosure attorney we spoke to put it: if a new car model failed as frequently as these mortgages now seem to be doing, it would have been recalled long ago.

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