Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Dec 20, 2012

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The Center for Responsible Lending has published a report on the state of lending in America and its impact on U.S. households. This publication is the first in a series that will show how lending practices have impacted American households.

According to the report, the mortgage industry recently operated under the “originate-to-securitize” system whereby brokers and lenders were compensated based upon transaction volume rather than loan performance. Subsequently, many borrowers received mortgage loans without having been properly evaluated by lenders and brokers who were all-too-focused on increasing their quota.

As a result, lending was performed under a less-than-standard practice. This made way for predators to begin prowling the market, where they preyed upon unsuspecting mortgage loan borrowers who were eager to own a home.

These predators also ignored traditional underwriting criteria as they rushed to lend more. Worse still, they had a myriad of weapons with which to abuse borrowers.

The Fangs and Claws of Predators

Predators offered borrowers serial refinancing that stripped away the equity in their homes. They offered mortgage loans with “teaser” interest rates that increased over time. These malicious predators were also far from colorblind. The report found that Latino and African-American borrowers were disproportionately targeted by sub-prime mortgage loan lenders who gave them higher interest rates than they actually qualified for. Worse still, predators impeded on the legal system by including mandatory arbitration clauses in loan agreements. These clauses prevented borrowers from pursuing justice in court over illegal or abusive terms.

Clearly, the federal government was lacking in monitoring the housing industry or else such predators would have never manifested in the first place. Had the government been more attentive to the needs and well-being of borrowers, then perhaps the whole housing crisis could have been avoided.

Still though, some good came out of the disaster.

Better Late Than Never

Following the collapse of the proverbial house of cards that was the housing market, the Consumer Financial Protection Bureau was born and was tasked with protecting borrowers. The Dodd-Frank Act of 2010 also required that lenders measure an applicant’s ability to repay a mortgage loan before lending it.

Not to be outdone by the federal government, some states were wise enough to enact their own borrower protections in the wake of a housing crisis that showed how unethical many lenders could be. Some states, like North Carolina, banned prepayment penalties on mortgage loans under $150,000.

Despite these efforts, and no doubt their good intentions, these protections came too late to be of use to many borrowers. While the debate on whether legislation is reactive rather than proactive is interminable, the real cause of the housing crisis may not necessarily be the big greedy banks.

The real cause may be the borrowers.

Not Quite Blaming the Victim

Borrowers clearly lacked the necessary financial knowledge to discern whether or not a mortgage loan was in their favor. By signing that dotted line at the bottom of an agreement, borrowers made themselves legally responsible for monthly payments on a new home. As the housing crisis showed, this led to millions facing foreclosure and losing their slice of the American Dream’s best pie, a home. For many others, this led to monthly payments that were so high they proved nearly impossible to pay, leaving many light wallets and near empty bank accounts at the end of each month amid a recession.

But, is pointing the finger at borrowers—modern adults who understand that a signature on an agreements means a requirement to pay it—really blaming the victim?

No, it is not. At the end of the day, the borrowers made a costly mistake, but it may not have been their fault.

Personal finances and understanding financial statements are not exactly typical coursework at colleges, let alone high schools. The educational system, or at least what most adults are expected to know before entering the financial world, has essentially failed to inform the average borrower about finances (as a side note, was created out of this very reason: a need for public loan education).

The housing crisis came about due to predatory lenders hunting and preying upon uninformed borrowers who were blinded by the chance to buy a home using a mortgage loan that they didn’t understand was unsustainably unaffordable. Lenders’ greed combined with the uninformed nature of borrowers poured into a volatile cocktail that burned away the dreams of many homeowners.

The government, at the state and federal level, only responded once the dust had settled. While we can hope that the next generation of homeowners fares better than their predecessors thanks to these new regulations, the predators will surely be lurking and waiting for their next opportunity. At least so long as their prey remains uninformed when it comes to such costly and complex financing.