Another rant about the mortgage industry

As a follow-up to my previous post about the perils of the financial services industry, I wanted to comment on the housing bubbles and the current state of the housing market. I am convinced that the housing bubble was the direct result of the mortgage lenders indiscriminately lending excessive amounts of money to people who couldn't really afford it. Take the Washington, D.C. market as an example. If lenders had followed previous lending practices, such as requiring down payments and lending only up to three times a person's annual income, housing prices would have climbed at a much slower rate. This is because there would have been significantly less people bidding up the prices of homes, with a much lower amount of available capital to raise bid prices. Housing prices would have gone up, but they would not have increased as significantly as they did during the housing bubble. In addition, those who owned homes would have mortgages that they would have been likely to continue to afford.

Instead, the loose money standards meant that large numbers of people had significant amounts of capital at their disposal, and were bidding up the price of houses. Individual mortgage burdens were at (or exceeded) the amounts they could maximally afford. As a result, the current situation evolved, where significant numbers of people can no longer afford their mortgage payments, leading to foreclosures and precipitous drops in housing values.

Sadly, this situation not only affects the banks and those individuals who borrowed more than they could afford, but it also affects the innocent people who actually can afford their homes and their monthly payments. Because of the significantly reduced home values, homes have become a relatively non-liquid asset. People who need to relocate are unable to sell their homes without losing significant amounts of money. As a result, they either need to continue living in a home that is too small (perhaps they have a new child), or have to rent out their home (perhaps they have to move for their job). So these people have to shoulder the burden generated by the greed of the financial industry, and by those people who borrowed more than they could possibly afford.

And the financial industry wants these same people - the ones who played by the rules, who are financially stable, and who are paying taxes - to help bail it out through low interest rates, more Fannie/Freddie mortgages, and a "stimulus"?

I think that the United States should only consider assisting the financial industry if every executive of Citigroup, Countrywide, Bank of America, Washington Mutual, etc. gives back their multi-million dollar compensation for the past five years. Then maybe we can talk. Otherwise, the financial industry should deal with its own problems.