Easy money lending led to crash

Neda Ghomeshi/Staff Writer

The infamous recession the United States is currently experiencing was a catastrophe waiting to happen. Honestly, it is one of the worst economic crises that our nation has ever faced.

Much has been written about the many factors that contributed to this tragedy. I believe one factor stands out: the availability of “easy money” to consumers.

Essentially, lenders made funds easily available and extremely cheap.

With interest rates at historic lows for a prolonged period of time, many homeowners and businesses expanded beyond their means without the proper financial qualifications.

Home prices were going up with no end in sight, supported by very low interest rates. The growth was visibly not sustainable, but no one wanted to believe it. Euphoric buyers never stopped to consider if they could actually afford their loans.

People got themselves into massive debt without considering the consequences. To me, was an unprecedented oblivion on the consumer’s part.

I am not blaming this recession only on consumers. It should not be denied that many lending institutions took advantage of unsophisticated citizens and lured them into large mortgages.

I simply believe that consumers were the ones signing up for the loans and they should have known better.

The lending and borrowing party came to a sudden crash in 2008 when the money available to support this euphoria dried up.  Now, borrowers and lenders are feeling the pain.

With insufficient income to pay their monthly mortgage payments, many homeowners have lost or are in the process of losing their homes. Bankruptcies and foreclosures sky-rocketed and created a domino effect which resulted in the failure of many banks which further destabilized the economy.

RealtyTrac, a data firm, estimates that foreclosure filings were about 2.8 million in 2009 and are proceeding at a pace that could exceed 3.9 million by the end of this year.

Although these numbers are terrifying, I don’t see why it came as a surprise to borrowers or lenders; way too many mortgages were issued to homeowners who did not have the means of paying off their loan.

The availability of easy money did not stop at the door steps. With a larger home comes more furniture and because most consumers did not have the cash to purchase furniture, more loans were taken out, yet again.

Loans at zero percent interest rates and deferred payment plans where ubiquitous.  This enticed consumers to purchase even more without giving consideration to the ability to pay back the debt.

Presently, those consumers are left with huge debts and no prospects for an easy recovery, just lots of furniture.

Today, able consumers are still paying off their loans while others have lost their homes and many of their possessions to foreclosure and bankruptcy.

According to the Organization for Economic Cooperation and Development, “The Federal Housing Administration has been authorized to guarantee up to $300 billion in refinanced mortgages, provided that lenders agree to write down significantly the amount of the loan.”

The FHA program is estimated to help up to 400,000 borrowers.

However, let’s be realistic; their help is not going to make a significant difference for our economy since 3.9 million mortgage loans may enter foreclosure by the end of this year.

This borrowing trend continued until the system could no longer bear its weight. An implosion occurred and everything came crashing down. No one should be surprised by this economic turn. I am not.