Quote:
Originally Posted by onewhippedpuppy
So what would your answer have been circa 2007? Quit loaning money in SoCal, Phoenix, etc? Homes were selling for market value only the market was inflated. So if the buyer has the means to pay the mortgage and the home is selling at appraised (assume market) value, what is your grounds for rejection? Remember that banks are not in the business of real estate appraisal and speculation.
This hypothetical obviously doesn't apply to a subprime situation. But that's really not the topic at hand.
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You don't need to quit selling houses. You could so some simple sensible things, though, like requiring 30% down when houses are clearly in a bubble.
A big part of this problem is the declining house prices, but another huge part is the zero percent down (or 5% down) practices. That is the bank just being stupid. By doing that, the bank is buying into the "RE Never Goes Down," "RE Will Continue to Rise at 10% Per Year" mentality.
The bank requires no money down because it believes the homeowner will build equity quickly through appreciation, rather than paying for equity up front.
The bank ABSOLUTELY is in the business of appraisal. That's why it obtains an appraisal before making a loan. The appraisal of the collateral is of critical importance. In a massive, obvious bubble, that of course would include a consideration of the future value, which the banks apparently foolishly and irresponsibly ignored.
Requiring money down is a long time practice, and makes a huge difference. A person who put 20 or 30 percent down has "skin in the game." If he walks, he loses that 20 or 30 percent, which he probably saved a long time to accumulate. He is far, far, far more likely to try to ride it out. But when you put zero down (or, in the height of the bank craziness, took money OUT when getting the loan), there is little incentive to not walk. The banks allowed that to happen, and it was extremely irresponsible.