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.