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The Homeowner's Crisis
When Jay Sukits picked up a copy of USA TODAY and saw a poll asking everyday Americans to identify who was responsible for the mortgage disaster, he was pleasantly surprised: Contrary to what he'd been hearing on the news, most people seemed to get it right.
According to the poll, most respondents felt mortgage lenders were to blame, followed by banks, then the government. What Sukits expected to hear was that Wall Street moguls were responsible. And that, he says, simply isn't so.
Sukits, a clinical assistant professor of business administration, feels qualified to make that assessment. He spent 20 years working on Wall Street and says as long as Fannie Mae and Freddie Mac maintained credit standards, mortgage defaults remained at acceptable levels and there were very few problems.
The trouble began, in his opinion, when the Community Reinvestment Act was amended in the late 1990s, allowing the two lending giants to relax their credit standards and finance mortgages for unqualified buyers.
"They threw those standards out the window, and they did so because of enormous pressure from politicians and lobbyists from the home builders associations," says Sukits.
The subprime mortgages were mixed in pools with loans that deserved top ratings, and firms that bought them had no means of deciphering that they had just taken on bad debt, Sukits says.
J. Jeffrey Inman, the Albert Wesley Frey Professor of Marketing and professor of business administration, believes homeowners who took on mortgages they couldn't afford also bear some responsibility for the crisis, even though they probably had good intentions.
"It's human nature to want things sooner than later, and to hear what you want to hear," he explains. If a loan officer is willing to give an individual money for a house he or she can't afford, the would-be homeowner will justify it somehow, he notes.
But sometimes people know they can't afford the mortgage and take a risk, just as some consumers will max out their credit cards and simply pay high interest charges.
"A lot of times, it's just because they don't have any other access to funds," says Inman. "But once you get into that hole, it's very difficult to get out of it."
To solve the problem, questionable assets must be purchased, put in a trust, and carefully sorted so that good credits are separated from the bad, documented, and sold back to financial institutions at 75 or 80 cents on the dollar, Sukits says. That would reduce the need to use taxpayer money to alleviate the crisis and mimics the method used to address the thrift industry failures of the late 1980s, he says.
Buying up mortgage-backed securities would drive down rates in the residential mortgage market, allowing people in danger of defaulting to refinance at lower rates, he suggests.
Inman believes the crisis will create more due diligence from financial institutions that previously relied on third parties to accurately evaluate assets. "These things don't change very quickly," Inman notes. "I think people will learn from this that you can't always rely on the past to predict the future. And if you take that one lesson away, I think we'll be okay."
As for the government, Sukits' opinion is the less intervention, the better.
"You've got to let the markets find their bottom," he says, including the housing market. If not, he adds, "all you do is delay the inevitable."
