Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Bank of America Corp (BAC), Wells Fargo & Co (WFC): When’s The Next Crash?

Making sure that people learn from the mistakes that they and others have made is the best way to avoid seeing problems repeat in the future. Unfortunately, despite the trillions of dollars that the U.S. spent in dealing with the aftermath of the mortgage meltdown, it appears increasingly likely that those who fell prey to the traps that brought on the housing-market crash and eventually the financial crisis aren’t any better prepared to avoid those traps in the future.

You vs. your lender
At the risk of oversimplifying the cause of the housing boom and subsequent bust, what happened during the decade of the 2000s essentially boils down to a simple sequence of events. The wealth effect from big gains in the 1990s helped drive home prices up substantially during that decade, leaving homes less affordable for those who were trying to buy. In response, banks came up with increasingly innovative yet dangerous mortgage products to help more potential homebuyers qualify for loans and purchase homes, thereby boosting demand even more. As low-down-payment loans gave way to no-down-payment loans and standard 30-year amortized mortgages yields gave way first to interest-only loans and then to negative-amortization mortgages, banks and borrowers both pushed the envelope to the breaking point. When interest rates stopped cooperating and speculative activity in the housing market reached a critical point, the bottom fell out of the market, first in the low-quality subprime arena and then spreading to higher-quality borrowers as well.

Source: Wikimedia Commons.

In the aftermath, we’ve seen exactly what lengths banks went to in order to get borrowers into homes. Legal battles over issues like the robo-signing scandal have led to settlements of billions of dollars against Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), and a host of other major mortgage lenders who bent the rules both before and after the housing bubble burst. The near-failure of Fannie Mae and Freddie Mac show the extent to which big banks set up transaction-oriented business models that valued loan volume over loan quality.
Bank of America Corp (NYSE:BAC)Moreover, Bank of America Corp (NYSE:BAC)’s recent settlement with mortgage-insurance company MBIA Inc. (NYSE:MBI) in part validates allegations of banks’ misrepresenting compliance with mortgage-loan standards, albeit without formally admitting responsibility.

Credit: Bank of America Corp (NYSE:BAC)

New regulations have focused on protecting mortgage borrowers from predatory practices. But all the regulation in the world won’t protect people who haven’t taken steps to learn the rules on their own, and thus far, prospective homeowners are failing miserably.

What people don’t know
To get a sense of just how little homeowners have learned from the mortgage crisis, take a look at these survey results from Zillow Inc (NASDAQ:Z):

More than a quarter of all homebuyers mistakenly believe that once they’re preapproved for a mortgage loan at a particular bank, they have to use that bank for their mortgage.

Nearly as many think that they don’t need to shop around for lower mortgage rates because their existing bank will always give them the best rates available.

A third of buyers erroneously think that federal law protects them by setting fixed guidelines for fees that banks can impose for closing costs, such as appraisals, credit reports, and other mortgage-related charges.

A third of buyers don’t even know what a mortgage’s APR is, let alone why it’s important in being able to compare mortgages from different lenders.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.