The Drug Dealer and the Drug User

Tweet Who is to blame? The drug dealer who peddles the potion of addiction or the user who keeps buying it?

Its the same with the mortgage industry. Who is at fault here? The mortgage brokers and lenders who perpetrated no money down loans or adjustable rate loans that will keep your payments low at the beginning and when they go up "you can always refi". That of course is the addiction, you have to go back to the dealer. OR is it the user, home owners and buyers who bite the apple and take on more than they can handle, intentionally or not.

You've seen the ads....No Money Down! Rates starting at 5.5%! We can finance anyone! When lenders compete...and so on. My favorite is the home equity loan ads. "Use your home's equity to take that vacation or, the best one yet, buy a BOAT!!! Now, I give more credit to the consumer than to expect people to jump at these enticements and go to Paris on a HELOC loan. But, home equity loans can be used for needed finances that are important. So while the ads may be misdirected, they plant the seed that "Hey, i can refi, lower my note, take some cash out, make improvements, pay down debt, and another favorite of mine, "put in a pool", OK Griswold.

But why bash the mortgage brokers and lenders? All they are doing is following their own dealer, the secondary mortgage market(who had it rough last week). They are Mr. Big or the cartel that provides the dealers with the drug and gives them the green light to sell it near the school yards and in the nightclubs. "Get me a few thousand addicts and I will buy out your accounts or corner. You just set 'em up and we will take it from there". Why would they do that? Some of these loans had rather high rates, or were discounted such that if the arms kicked in, the secondary buyer would reap a nice yield. What Mr. Big did or didn't know is that the dealer on the street may have stretched the home value or credit worthiness of the home buyer. Maybe they said they made more money than they did, or the alimony wasn't as much or last as long as stated. The fraud on all sides of the transaction is another topic for another day. IT was wide spread and the stories are as just unbelievable.

So then it must have been the greedy or uninformed home buyer. When prices are appreciating at unprecedented rates, why not leverage at 120% Loan To Value. In a year, you will be at 90% LTV. Its the American Dream to own a home. The dream, however, doesn't necessarily define how much home you need or what the LTV should be.

The bottom line is all of the above and more is to blame for this debacle. But, the symbiotic relationship between the borrower and the lender is the crux of the problem and there is no other reason than that. At the application, when questions were asked and promises made, that is where it all began. At any point in that process, either side could have said, NO, this is too much, don't do it, borrow less, leverage less, or the more appropriate question at the time, when will the bubble burst? Gee, didn't we hear that question asked for about the past 5-7 years?

What do you think? Dealer or User? I wonder who had the nicer car? The sad fact is that neither may have a nice car come next year.