How to Build a House of Cards

Looking back, big new homes with little or no furniture foretold today's mortgage mess.

I've been in the home-building business for 20 years, the past 10 in Loudoun and Fairfax counties. During the 2000-05 housing heyday, I saw scores of people buy homes beyond their means. Many of these homes were nearly unfurnished many months after settlement.

Owners spoke of big mortgages, no cash, little credit. "We're strapped . . . we'll furnish later," they said. And later wasn't too far away. Back then homes appreciated 15 to 20 percent a year; soon the homeowner qualified for an equity line of credit. In came the furniture and more debt. (How fast did prices increase? Buyers in line overnight to purchase at one new community were told prices would jump $5,000 every third deposit. This news wasn't well received but didn't shorten the line.)

Then came 2006: The economy slowed, home buyers disappeared and home values dropped.

I think back to buyer-qualifying paperwork during the boom days. A typical buyer was a couple in their thirties with young children and a decent dual income. There was little savings, but the equity in their current home plus tapping retirement accounts produced the down payment for the move-up home.

They had two car payments, student loans and credit card debt. And they wanted the biggest, nicest McMansion they could afford -- correction, qualify for.

I remember when home buyers had to meet qualifying ratios of "28/36" to get a mortgage. That means a mortgage payment had to amount to 28 percent or less of gross monthly income (front-end ratio). And all debt -- mortgage, cars, student loans, credit cards -- had to total 36 percent or less of gross monthly income (back-end ratio).

Those ratios loosened during the housing boom. I saw couples whose back-end ratio was 50 percent or more. So a $10,000 gross monthly income would qualify a buyer for about $5,000 in monthly debt. Buyers couldn't save, and they lived on the edge. Financial havoc loomed with the slightest misfortune.

But buyers wanted the home, builders wanted the sale and lenders wanted the loan. It was rare to see a buyer denied a mortgage.

Now Loudoun County's foreclosure rate is among the highest in the region. I don't know how many of my old buyers are among those facing foreclosure, but the number couldn't surprise me. So many people chose to live beyond their means. And lenders welcomed them with open arms. I'm sure steadily rising home values back then rationalized decisions by buyers and lenders. But who doesn't know that real estate markets have up and down cycles and that surviving the latter must govern lending and borrowing choices?

We know that Fannie Mae, Freddie Mac and many lenders relaxed guidelines, approved billions in bad loans, failed, and cried for help. Now Congress is rushing to the rescue with at least $700 billion from taxpayers, many of whom pay their mortgages. But whom, exactly, are we rescuing?