To the bank agent, Sue Rose looked like any other homeowner seeking to refinance six years ago.
Rose heard the same pitch that many others who are close to paying off their mortgage got. Why not take out some of that equity? Want a new car? A boat? Don't you want to travel?
But Rose, community service director for the McHenry County Housing Authority, wasn't any regular homeowner. She knew what she wanted, and it wasn't anything the bank was dangling in front of her in the form of easy money.
She wanted to retire without a mortgage, and more importantly, she said she had no desire to "be sitting on the other side of my desk" as a homeowner in over her head. She stood her ground, despite an agent's persistence.
"If I didn't have the personal experience I have, I could see how someone could succumb to that pressure," Rose said.
But many others did succumb, or needed no pressure at all, given that home loans and equity loans were all but being given away. While some decided to use their homes as piggy banks, many others coming through Rose's door just bought homes they could not afford.
The story of the U.S. housing crisis is long and complicated. It is a tale of greed, gullibility and lax enforcement. The reasons are many, both subtle and gross, but in the end, it boiled down to people buying homes they couldn't afford with loans they should never have received. Government shrugged off its regulatory responsibilities and obligations in an effort to encourage home ownership.
No one knows for sure when the recovery will start. Or even if we've hit bottom yet.
<subhed>"Excesses and bad decisions"</subhed>
A somber President George W. Bush addressed a nervous country on Sept. 24, 2008. The economic downturn that had begun the previous December had worsened fast into the Great Recession.
Bush laid out part of the chain of events leading to that point – while the decade-long swell of foreign investment made it easier for Americans to get credit for many things, it was bad mortgages that were fueling the downward spiral.
Mortgage lenders approved loans without scrutinizing borrowers' ability to pay it back, and borrowers took on larger loans than they could afford, assuming they could sell or refinance for more money later.
A housing construction boom to satisfy the inflated demand resulted in an inventory of far too many homes for too few buyers. Prices fell, and many borrowers, especially those with adjustable-rate mortgages, were stuck with homes losing value and payments they could no longer meet.
"Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions," Bush told the nation.
Nothing the president said came as a surprise to U.S. Rep. Don Manzullo, R-Egan. With the housing boom in full swing, Manzullo and other lawmakers had tried several times since 2000 to pass laws tightening up standards for government-sponsored lenders Fannie Mae and Freddie Mac.
The bills went nowhere, a fact that Manzullo blames on groups insistent on keeping the "good times" rolling.
"Anybody who had anything to do with the housing industry was opposed to touching anything," Manzullo said.
Lenders, with rules the government thought would encourage home ownership, extended credit to borrowers who in the past would be unable to qualify for home loans.
The number of subprime mortgages skyrocketed from 8 percent of the total in 2003 to more than 20 percent in 2005 and 2006, according to a 2008 study by the Joint Center for Housing Studies at Harvard University. In 2006, more than 90 percent of those subprime loans were adjustable rate – in many cases, the discounted rates reset after two years, leaving shocked borrowers unable to keep up.
In more and more cases, lenders were giving out "liar loans" – borrowers did not have to show proof of income.
Sue Rose began to notice something odd – her clients, who in the past wouldn't have qualified for any kind of loan, were buying homes. Job history and good credit no longer seemed to matter.
"That just didn't seem to be the case anymore," Rose said. "There seemed to be a lot of easy money, and that was very surprising to me."
Government pressure to increase loans for home ownership was a frequent topic among the loan officers of Harvard State Bank at their Tuesday morning meetings.
Bank President Roger Lehmann said it did not take the bank long to decide to stick with traditional lending practices and not bow to government pressure or the lure of lucrative, but riskier, loans. Better to lose that potential business, he said, than open up the 140-year-old institution to risk.
"We said we're not going to do anything different: The same 20 percent down, all the steps," Lehmann said. "If some people walk because we don't do it, they walk."
<subhed>"A tremendous backup"</subhed>
Through much of Sue Rose's 16-year career with the housing authority, one or two calls a year from a homeowner in foreclosure was the norm.
Starting in 2008, it became one or two calls a week. Homeowners were in over their heads. Although the housing authority doesn't offer mortgage assistance, Rose would hear their stories to see if they qualified for some kind of help from her agency or another.
And it wasn't just subprime borrowers coming to her. People were in trouble who could afford their homes but had taken out equity loans and second mortgages to pay for things like credit card bills and cars. One client Rose remembers took out money from the home to buy a recreational vehicle.
As of 2007, the ratio of debt to disposable personal income in U.S. households stood at 127 percent, up from 77 percent in 1990. Much of this increase, according to the U.S. Bureau of Economic Analysis, is mortgage-related.
"There were people who owned their homes mortgage free, paid off, or inherited their house," Rose said. "When the mortgage money became easy to get, I saw people taking out huge equity loans, just to live."
The number of calls to Rose increased through 2008 and 2009 to several calls a day. Each foreclosed home helped contribute to a much larger crisis, the same way that harmless snowflakes pile up to create an avalanche.
Home loans are packaged together into mortgage-backed securities and sold to investors worldwide. Two of the largest buyers were the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., i.e. Fannie Mae and Freddie Mac.
Investors assumed such securities were trustworthy, given that both companies are chartered by Congress. This gave Fannie Mae and Freddie Mac the ability to borrow enormously and fuel the growing market for risky mortgages. Ratings agencies gave the securities top-notch ratings.
As the mortgage defaults mounted, so did investors' losses. Banks large and small faced collapse, and others stopped lending.
"Once those [mortgages] started going sour, then the bonds, which had been given Aaa status by Moody's and Standard and Poor's, started to bleed," Manzullo said. "It created a tremendous backup like a sewer main."
Government has tried since the crisis to get credit flowing again and to impose rules to prevent another housing bubble.
It wasn't until Oct. 1, 2009, that Manzullo got his long-sought rule passed requiring Fannie Mae and Freddie Mac to have written proof of earnings for a home loan. Manzullo said it took far too long, and he told Federal Reserve Chairman Ben Bernanke as much during hearings.
"The Fed can create $600 billion in money that doesn't exist out of [quantitative easing] without going to Congress, but for something this simple, they couldn't do it," Manzullo said.
But to small bankers like Lehmann of Harvard State Bank, the slew of regulations taking effect in the wake of the crisis are hampering, not helping.
Before the housing market crash, people got loans they never should have received. With the new rules, Lehmann said, people who would otherwise qualify can't get them.
He now has 1 1/2 full-time employees whose job it is to ensure compliance with the hundreds of rules being phased in under the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law last year.
"It seems like every month, there's a new regulation or a change in an old one," Lehmann said. "That in itself has ground things to a halt. We can't give loans out to people we would have five years ago because of the new regulations."
State Rep. Jack Franks, D-Marengo, agrees. As chairman of the State Bank Group, which oversees five McHenry County branches, rules at the federal and state levels, aimed at culprits such as AIG and Bear Stearns, are keeping small banks from aiding in the economic recovery.
"I've seen a plethora of banking regulations, closing the door after the cows have left, being placed on small community banks that had nothing to do with the mortgage crisis," Franks said. "The state is adding regulation on top of regulation as well, to punish them for a sin they didn't commit. It's a very touchy situation."
More importantly, banks want to get the foreclosed homes they now own off of their books and into the hands of responsible borrowers.
Long gone are the days where a few months of nonpayment would get a homeowner kicked to the curb, Rose said. There are so many of them, and the banks are so hesitant to add more homes to the tremendous inventory they already have, that the banks are in no rush to kick them out.
"It's not uncommon to see people in their homes for two to three years after they haven't made a mortgage payment," Rose said. "I saw one where the homeowners hadn't paid in five years before they finally had to leave."
Franks said he long ago gave up on trying to predict when the market will recover.
"Who knows? Anyone who tells you they know is going to be kidding you. I'm not sure anyone knows where the bottom is," Franks said.