What ever happened to common sense? People making minimum wage getting approved for a million dollar loan? Do you need to have a college degree to know that something there smells fishy? My first job out of college was working for a mortgage company. In 1994 the standard mantra was that an applicant could afford 2 1/2 times their annual income.

It sounds like your neighbor didn’t bother to read the documents he signed when he got that loan! If he can’t read English, then perhaps the case could be made that something fraudulent took place. I’m not sure what obligation the lender has in that instance.

Most people have the ability to read the documents they sign — they simply choose not to. If they have questions, they should find answers. That’s what I did. When things go bad, they claim they “didn’t know” the terms. Trouble is, that defense cannot hold up any more than ignorance of the law can be an excuse for breaking it.

It probably sounds like I’m not holding lenders, developers, and agents responsible enough. I just feel that in the end, the buck stops with the person signing the papers for the loan. Is that unreasonable?

Mostly, I’m glad this situation is unwinding now because the longer it goes on, the more it gets out of hand, the worse the reckoning will be when sanity finally does return.

You’ll have to explain more about the rate of appreciation. I’m not getting that one. If incomes rise at 3% per year and real estate rises even 6% per year, if you extrapolate this over enough time, the divergence between the two will grow to the point that nobody can afford a home.

Thanks for taking the time to comment!

You are like the people who feel no sorrow for pilots that die because they are “…all rich guys”.

The speculators have had two years since the peak to get out. It is the people who bought a place to live that are getting whacked now.

I feel no sorrow for speculators who have a profit motive. However, there are people who were put into houses on adjustable loans that they did not understand and now are losing them due to rate adjustments. It was a scam by realtors, mortgage brokers and bankers. I could not understand in late 2005 how the guy across the street from me could buy a house I could not afford when he spoke almost no English and worked under the table cash construction jobs. My engineering degree and MBA do not qualify me for that size of (30 year fixed) loan even though I have to pay taxes and he doesn’t. Then when the rate adjusted from the teaser “stated income” (aka based on lies) loan after a year he lost the house. This poor guy put money he could not afford to lose into improving this place that he mistakenly thought he owned. He should have been renting (in Mexico, but that is another issue). Real estate “professionals” did that to an unsophisticated buyer with a wife an two little kids to support.

So my So Cal house is worth 3 times what I paid in 1994 vs 4 times two years ago. Maybe it will be only 2 times later. It is a place to live for me. But some people are being hurt after professionals in real estate told them they could afford a house.

I still think that someone who bought your Irvine condo at the time of your 2003 blog would still have enough equity today to buy a nice Pitts or Yak. We have a lot further to fall from here and if the Chinese decide they do not want to continue to put billions into our govt and mortgage bonds the high interest rates will make the current “crisis” look like the good times.

Also, your simple math on the rate of appreciation being tied to income growth does not hold because there are factors like demographics (big increase in new housholds due to 25-35 year age group growth starting in 1999), supply and demand of houses and credit, that drive prices far more than income growth.

Keep flying and singing.