Why we’re in the mess we’re in

Stupid borrowers, stupid lenders. I was poking around the records of a certain property just now to see what I could learn about its debt which is being foreclosed on. Here’s the deal: The owners paid $4 million for it in 2007 and took out a mortgage for $2.9. Two months later they borrowed another $400,000 and two months after that they added another $950,000. Early in 2008 they tacked on another million in debt so they’ve now encumbered a house they paid $4 million for with $5.2 million +. Some of that money was used for renovations, but there’s no way it added up to even a million, let alone $2.4 (I’m fudging the numbers a little bit – these people have troubles enough).

So who’s to blame here? The homeowner/borrower first and foremost. If he’s financially sophisticated enough to accumulate the wherewithal to purchase a $4 million house, he should know better than to saddle it with debt exceeding his equity. This isn’t hapless Bessie succumbing to the wiles of a snaky mortgage broker while sitting on her plastic-covered couch.

But what about the banks that made these loans? Not the first lender - $2.9 on a $4 million house is well within reasonable lending guidelines and even a bt conservative. Each loan after that becomes increasingly absurd. What frosts me about this situation is that, so far as I can understand it, these lenders went under, someone – Soros or warren Buffet, probably – bought the debt for pennies on the dollar and is now in line to be paid full face value on that debt by middle class taxpayers. Doesn’t seem right.

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One response to “Why we’re in the mess we’re in

  1. Cos Cobber

    I totally agree with you on the dumb borrowers and dumb lenders, plenty of blame between the two of them….and frankly, the extra loans sound a bit like fraud was committed by the borrower (lots borrow form multiple banks at nearly the same time on the same asset?).

    Anyways, I disagree about Soros and Buffett or whichever face you want to use for unjust ‘banker.’ If it was such a smart deal to buy such debt for pennies on the dollar than the Feds should have done so themselves and in many instances they have and that has pissed people off too. Much more of the blame and frustration in the entire banking/lending crisis should be directed at the stupid borrowers/fraudulent borrowers and stupid lenders/fraudulent lenders and not with those who made money catching the falling knives.