The beginning of 2009 saw the United States, the European Union and other nations in a financial quagmire, caused in large part by the huge problems in the real estate markets. The "subprime lending crisis" has resulted in literally millions of delinquent mortgages, with many of these on the verge of foreclosure. It's a housing crisis unmatched since the Great Depression, especially in the United States.

What went wrong? What brought about this crisis in housing that has led to the collapse of major financial institutions such as Lehman Brothers and Bear Stearns, and caused the collapse of many formerly sound banks?

Americans have had a long love affair with homeownership, which has been the cornerstone of the American dream. Moving up from renting to owning one's home provided a feeling of security. It also came to be seen as a solid financial move. Since house prices usually rose year after year, owning a home was one way average people could hope to gain some measure of financial independence.

The U.S. government helped the process, as homeownership became government policy. The GI Bill after World War II made it possible for millions of veterans to buy homes with little or no down payment. This policy helped returning soldiers reestablish themselves, and with a growing economy and a strong commitment on the part of the borrowers, relatively few ended up in foreclosure.

Seeking to extend these benefits to the general public, Congress passed the Federal Housing Act, creating the Federal Housing Administration. Now the average American could, with as little as 3 percent down, buy a house on very favorable mortgage terms, because Uncle Sam was ultimately backing the loan.

In the aftermath of Sept. 11, 2001, the Federal Reserve lowered interest rates to get the economy moving again. It worked, as lowered interest rates made possible lowered mortgage rates. A strong economy, low interest rates and low unemployment proved a potent brew that brought another wave of buyers into the market.

Prices rose, in some markets as much as 10 percent a year. Speculators jumped into the market, hoping to make quick profits on the rapidly rising prices. The bubble grew and grew, as U.S. homeownership rose from 65.7 percent in 1997 to just under 70 percent by 2005.

The bubble bursts

And then, in mid-2007, the bubble burst. First, hundreds of thousands who had financed homes with little money down, and taken on risky, subprime mortgages with high interest rates, watched to their horror as their mortgage rates reset to higher rates.

About the same time, housing prices began to fall across the United States. By mid-2008, millions were "upside down," meaning they owed more on their homes than the homes were worth. With negative equity, payments they could not afford and little of their own money in the homes, people simply walked away. More and more empty, foreclosed homes became eyesores, driving down the value of other homes in their neighborhoods. Overnight, it seemed, America's dream of homeownership became America's nightmare.

The National Association of Realtors reported that as of early 2009 nearly one homeowner in 10 is behind on payments, and nearly 3 percent of all homes are in danger of foreclosure. Most economists and industry observers feel that the bottom of the housing market may not be reached until mid-2009 or later. How did the dream of owning a home turn so quickly into a financial nightmare for so many?

Plenty of blame to go around

The meltdown was in full swing during the recent presidential race. During the debates, the candidates were asked what, in their opinion, led to the mortgage crisis. John McCain blamed homeowners who borrowed too much and provided false information on loan applications, while Barack Obama faulted greedy bankers and the Wall Street interests who were all too ready to invest in mortgage securities of dubious value.

In truth, the blame must be shared by most of the players in the real estate game, a conclusion shared by industry observers, economists and others who have analyzed the mortgage meltdown.

Certainly, a major culprit is the mortgage lending industry. Economist Mark Zandi, in his recent book Financial Shock: A 360-Degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis, points out that the perception that real estate prices could only go up, year after year, established an atmosphere that invited lenders and financial institutions to loosen their standards, thereby risking default.

"In reality, there is plenty of blame to go around," Zandi states. "A financial calamity of this sort could not have taken place without lots of hands tilling the soil and planting the seeds. Among the elements that fed the crisis were a rapidly evolving financial system, an eroding sense of responsibility in the lending process among both lenders and borrowers…, lax oversight by policymakers skeptical of market regulation, incorrect ratings, and…the ‘animal spirits' of investors and entrepreneurs" (p. 2).

Zandi describes how new types of financial securities managed to cloud and disperse risk to the extent that even sophisticated investors were not able to determine their real worth.

"The risks inherent in mortgage lending became so widely dispersed that no one was forced to worry about the quality of any single loan. As shaky mortgages were combined, diluting any problems into a larger pool, the incentive for responsibility was undermined…There was a belief that someone—someone else—would catch mistakes and preserve the integrity of the process" (p.3, emphasis original).

Simply put, constantly rising home prices reduced the risk to lenders. Rising home values made it easier to justify making risky loans to hundreds of thousands of people who would never normally qualify for mortgages, especially if many of those applicants were willing to falsify their loan applications.

Zandi continues, "Skyrocketing house prices fed many dreams and papered over many ills. Households long locked out of the American dream finally saw a way in…Borrowers and lenders implicitly or explicitly conspired to fudge or lie on loan applications, dismissing any moral qualms with the thought that appreciating property values would make it all right in the end."

The development of subprime lending during the 1990s created conditions that, at first, worked to the benefit of both borrowers and lenders. Former Federal Reserve Chairman Alan Greenspan considered the subprime movement a positive development, because it expanded home ownership to millions of low-income people.

With subprime financing widely available, vast numbers of people previously locked out of the home buying market became potential homeowners. It was the signal for everyone to jump into the game. New housing developments sprouted like mushrooms across the land as homebuilders responded to a swelling market. Real estate brokers and their agents not only encouraged people to buy, but often to buy more house than they needed or could afford.

Appraisers played their part by, in too many cases, simply appraising a house for whatever the builder or mortgage lender needed the figure to be. A decade of intense home demand drove prices up 85 percent on average from 1997 to 2005.

Greed—the basic problem

Many commentators have observed that the housing bubble, which began losing air in 2007 and collapsed in 2008, is not the first financial bubble in American economic history. Recent memory takes us back to the technology "dot com" bubble that burst in 2000, devastating the financial portfolios of millions of investors. Real estate itself has experienced bubbles before. Then, of course, there was the Wall Street crash of October 1929.

But what do all of these "bubbles" have in common? Is there a basic, underlying cause for the type of financial behavior that causes people to drive up the price of assets to unrealistic levels, only to see those prices come crashing down?

Zandi alludes to widespread fabrication of information provided on mortgage applications and to lax oversight of the quality of mortgages contained in mortgage-backed securities.

He has not been the only observer to point this out. John Bogle is founder and former CEO of the Vanguard Mutual Fund Group, the second-largest mutual fund company in the United States. Commenting on his October 2008 book Enough: True Measures of Money, Business, and Life, Bogle offers the kind of candor that seems to be sorely lacking in our financial system:

"We just got overwhelmed with greed, with creating financial instruments not that benefit the investors in those instruments, but benefit the purveyors, the marketers, the investment bankers… Greed is not confined to the financial markets, it just finds its worst manifestation there… Our society has changed. It's kind of a ‘me' society, a ‘more' society, an egocentric society, an arrogant society in many, many ways" (as quoted by Michael Smerconish, "Head Strong: Prescience on Greed, Arrogance of a System," The Philadelphia Inquirer, Oct. 5, 2008).

It's clear that "good" old-fashioned greed played a major part in creating the problem. What many may not realize is that the Bible foretold conditions like these nearly 2,000 years ago. Writing to his associate Timothy, the apostle Paul spelled out the conditions "in the last days."

"But know this, that in the last days perilous times will come: For men will be lovers of themselves, lovers of money, boasters, proud, blasphemers, disobedient to parents, unthankful, unholy, unloving, unforgiving, slanderers, without self-control" (2 Timothy 3:1-3).

Notice that love of money and lack of self-control would be widespread—just the type of character flaws required to lead to the mortgage meltdown.

Since World War II, the size of the average new home in the United States ballooned from about 1,200 square feet to more than 2,500 square feet. Hundreds of thousands of home buyers were told they could qualify for much larger loans than they could really afford. To a great extent, it was a play on the natural tendency of humans to want more and more. It was easy to rationalize, "Let's buy the largest house we can afford, because it will gain $50,000 in value the first year."

Notice what the apostle Paul had to say about lust for money. "But those who desire to be rich fall into temptation and a snare, and into many foolish and harmful lusts which drown men in destruction and perdition. For the love of money is a root of all kinds of evil, for which some have strayed from the faith in their greediness, and pierced themselves through with many sorrows" (1 Timothy 6:9-10). Just consider the sorrow and misery brought on by the thousands of foreclosures in the past year.

Don't get us wrong. Prosperity is good, and our Heavenly Father wants this very thing for all of us. He inspired John to write, "Beloved, I pray that you may prosper in all things and be in health, just as your soul prospers" (3 John 2). What He wants, however, is that we keep our priorities straight. "No one can serve two masters…You cannot serve God and mammon" (Matthew 6:24). Mammon here is translated from the Greek word mammones, meaning wealth. What the Bible teaches is a balanced approach that puts God and His law at the center of our lives.

Having a home is good, and the time is coming when all the world's inhabitants will enjoy the blessing of homeownership. But it will be done in balance. People will not get themselves in hock for 95 percent mortgages on huge homes in markets where real estate values fall just as easily as they rise.

Looking down to a time not long from our present day, the prophet Micah foretold a time of prosperity and peace. "They shall beat their swords into plowshares, and their spears into pruning hooks; nation shall not lift up sword against nation, neither shall they learn war anymore. But everyone shall sit under his vine and under his fig tree, and no one shall make them afraid" (Micah 4:3-4).

Owning property the right way will be the norm, not the exception. God speed that day. WNP