First, two favorite quotes:
Never attribute to malevolence what can be adequately explained by incompetence. (author unknown)
It is better to fail conventionally than to succeed unconventionally. (-John Kenneth Galbraith)
And now the latest bit of excuse-making about the housing crisis, in the last two lines of an appraiser’s letter to the editor in The Washington Post, 30 Dec. 2008:
“Most people subject to foreclosures are good people who received good advice that they could refinance their homes when the adjustable rate changed. No one had a crystal ball buffed enough to know that values would fall below what their homes were purchased for.”
Good advice? “You’ll never have to pay more than the teaser rate? Even if you got a subprime loan because you’re not a good credit risk, in a few years time you’ll be able to refinance at a super-low interest rate? If you do refinance, the original adjustable-rate mortgage (ARM) won’t have a stiff prepayment penalty? The market price of your home will rise so fast that you can borrow however much you need against it?” (The mantra that “housing prices always go up” wasn’t even true at the time — adjusted for general price inflation, housing prices were basically no higher in 1999 than in 1979, and they fell during the first halves of the 1980s and 1990s. I think “always” really meant “even during the stock-market collapse of 2000-2002.” Kind of a short time horizon there.)
A crystal ball would have been nice, but a simple reading of past data about housing prices and interest rates and an understanding of why banks would issue ARMs in the first place would have been enough to produce some sensible advice. (Or failing that, just pick up a money and banking textbook and look for “mortgages, adjustable-rate” in the index. I’ll save you the trouble; you’ll find something like this: “Changes in interest rates can be very risky for banks. Adjustable-rate mortgages allow them to transfer that risk to the borrower. Since borrowers are usually not in a good position to absorb such risks, they usually avoid adjustable-rate mortgages.”) Granted, it seems true that all that crappy advice about how anyone can buy a home on cheap credit and bear no risk was considered good advice in much of the mortgage and housing markets up until about a year ago, and I’m sure many of the people giving that advice meant well. But they were following the herd and were either unwilling or unable to look up basic information on house price trends or ARMs. So don’t convict them of fraud. But don’t consider them competent at their jobs either.