MY TURN By Diane Butler

Where this economic mess was born Wishful borrowing, irresponsible lending and regulators who looked the other way; these have been the catalysts for nation’s financial meltdown and the soaring unemployment that has followed. Everyone has seen and heard these headlines. Many wonder how all of those people could have made such bad choices? What happened? Traditionally, the idea for all was that the American dream of home ownership should include more people. The problem with the idea was that not everyone was prepared to own a home. Real estate markets have always been cyclic in nature. Some may remember the days of 18% interest, when a 20% down payment was required just to qualify for a home. Buyers needed to be qualified under the formula that no more than 28% of your income went to principal, interest taxes and insurance. Your other debts, like car loans and credit cards, could not exceed 32 percent of your income. Simply put, you had to have money down and you had to have enough income to be able to afford it. You had to be able to make a commitment to the investment. If you didn’t qualify, then you had to work harder and save more money until you could qualify. Then changes came. The Banking Act of 1999 set the groundwork for today’s problems. Rules designed recreate the banking system during the Great Depression of the 1930s were said to be too restrictive for a 21st Century economy. Lawmakers relaxed the rules. Banks started merging into mega-banks, qualifying mortgage formulae began to ease, then disappear. Money was easy and tens of thousands of new mortgages were issued. So many, that they were packaged and investment banks and insurance companies started trading them as securities. It was a boom. Still conservative lenders like many small town banks adhered to strict lending practices and turned down potential buyers who were unable to qualify. But with introduction of mega-banks, with nation-wide scope, the prospective home owners simply went to other available sources. Instead of 20% cash for a down payment you were now able to have financing to include the down payment. By 2006, a mortgage could be financed over the amount of the purchase price. For existing home owners, temptation came in the form of equity lines of credit. Many homeowners have received letters informing them of equity in their homes. They could cash it out for home improvements, to buy some thing that they wanted or deserved, possibly a new car, second home or investment property. Some of those lenders sent letters to people who were owners of modest homes, because it was what they could afford. Sometimes those homeowners were not really savvy to the terms of “qualifying formulae,” and they were led into borrowing more money. It seemed to be easy money and they just wanted it. People were led to consider homes that by any legitimate consideration of their incomes were beyond their means. They were told they could take their time and save with that low interest and strengthen their credit. They would be able to refinance in the future. For many that future never came. That was the start. At the time, it didn’t sound like a lot of bad choices to those who were not money savvy. Others, like the lenders, saw a chance and gambled. Diane Butler is a 20-year area Realtor, associate broker, licensed in New York and Pennsylvania.