Indeed there is a sub prime mortgage mess, but the question is: who should we hang? Let’s examine the short list of suspects.
Realtors
It was the real estate agents who reaped profits from the housing bubble and perpetuated its existence. Sell. Sell. Sell. That is their job. They all said, “real estate always appreciates.” Wrong. Sometimes it goes down. Verdict: Guilty.
Appraisers
Appraisers were under arm-twisting pressure from mortgage brokers to make the numbers come in where they needed to be to get the loan to go through. How many appraisers were pressured? Plenty. How many of them succumbed to that pressure and inflated home values (which spurred more real estate sales)? Plenty. Verdict: Guilty.
Alan Greenspan
The FMOC, Alan Greenspan and the Federal Reserve in general made money cheap. It was as close to growing on trees as it may ever be. Economic heartburn? Alan’s answer: turn on the money faucet. Mr. Greenspan had to know that a correction was coming. Money was so plentiful that people were getting loans in excess of property values. Greenspan encouraged reckless borrowing by making money cheap. Verdict: guilty.
Borrowers
Many borrowers lied to get into loans, driving the “liar loans” market. Others were undereducated about mortgages. Should it concern us that people graduate from high school without any training whatsoever as to how to navigate the largest transaction of their lives? I think so. I say: out with band practice and in with Mortgage 101. Whether out of ignorance or deceit, a lot of borrowers made poor decisions. Verdict: guilty.
Mortgage brokers
They pushed prime borrowers into sub prime loans to make better commissions. They gussied up mortgage applications to get them to go through. Many borrowers didn’t understand what they were buying. “Don’t worry. You can refinance in 5 years.” Verdict: guilty.
Lenders
They originated loans that they knew were likely to fail. Verdict: guilty.
Investors
They only looked at the numbers. They never thought about these loans as representing families. “People” isn’t a word investors use that often. Verdict: guilty.
Who should we hang?
I vote that we hang the ratings agencies. On one side of the pipeline are the realtors, mortgage brokers, appraisers, and lenders. On the other side are the investors. In between are the ratings agencies. Without them, this never would have happened. The lenders couldn’t have sold sub prime paper to everyone without the blessing of the ratings agencies. If the paper had been rated properly right from the start, we wouldn’t be in this mess.
The mortgage mess has left a lot of collateral damage in its wake. Responsible borrowers who took out fixed rate mortgages are left with depleted equity as a result of the housing bubble. Landlords won’t have as many new tenants if foreclosures that would have happened naturally are staved off by bureaucrats. And from the sound of Paulson’s plan, if you are current on your mortgage or if your credit score is too high, there will be no aid for you. It will take years for the housing market to straighten itself out again, and the Paulson plan will only delay that correction. We will have to pay for the money we got on the cheap eventually. Paulson’s plan will only delay what the free market should have taken care of. Will the investors sue the banks? If there was fraud in the origination process, will investors bring suit against the banks in an effort to force them to buy back the paper? If that happens, it could get worse. When it’s all said and done, the Paulson plan will be seen as a joke. There will be lots of talk about increasing mortgage broker requirements, but the real culprits that should hang, in my opinion, are the ratings agencies.
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{ 11 comments… read them below or add one }
You forgot the press! Guilty for getting it wrong at nearly every turn.
Personally, I blame capitalism. Unfortunately, an issue like this is to big to lay blame one group over another. The entire system failed. That happens every once in a while with capitalism, but it’s not like there’s a better alternative.
I have always blamed the mortgage lenders and continue to do so. They decided to forego internal well staffed quality control systems in exchange for vendor managed outsourced window dressing. They decided to loosen underwriting standards. They embraced vendor managed automated cheap and fast crappo products. They allowed hard money guys into the room who sold them on the subprime refi churn method of maintaining servicing portoflios. They decided to allow originator mentality to rule. They gave reps and warranties to investment bankers who relied on due diligence as having real meaning.
Mortgage lenders had the power and total control.
I do believe in the power of hope and the power of atonement.
Mortgage lender’s still have the power but they must restore faith and credibility and they can do so by demonstrably stepping up to the plate and creating real quality control and due diligence. The Uniform Closing Instructions, if they are serious and not just pretending, will go a long way in the right direction. That coupled with the other recommendations in the Fitch Special Report are a good start.
Wade, great article!
I’ll say greed is to blame and greed doesn’t discriminate as to profession - all parties are culpable. In the end, we all stand individually responsible for what we do.
The question I ask (rhetorically?) is no matter what hat you wear (Realtor, Appraiser, Fed, borrower, broker, lender, investor, rating agency, etc.), do you blame that person in the mirror?
Hey, we are where we are, and now moving forward, the question is: what are you going to do with your hat now?
Burn it and buy a new one.
Obviously, this is a complex question with complex answers. Todd’s answer of Capitalism certainly is on the mark. But was it true capitalism…or greed?
Listen, EVERYONE knew something was wrong. I had a neighbor who had a re-fi loan that was 50% higher than his house was worth. I laughed out loud when he told me what he had done.
I sat (and still do) at tables as people tell me the reason they can’t sell there house for what it’s really worth is because they refinanced a time (or two) and used the money for cars, education, medical bills, etc.
I’ve seen mortgages written and contracts written for people who had no business buying houses.
I’ve seen people with $38 in savings become “real estate investors”…or more-rather, specualtors.
At the bottom of all of this was the attempt to get something for nothing. Or at the bare minimum, to ignore sound fiscal responsibility in favor of those few extra thousand dollars.
Look, I sold real estate and originated for a few years BEFORE I became an underwriter. As an originator I used to beg before my manager and underwriter to give these people a chance.
When I became an underwriter I decided to give them a chance and guess what? I saw families go into foreclosure the first year and lose everything. I learned my lesson and from that point on I understood that responsible lenders are like parents who use tough love.
Consumers are layman. They don’t know, they just want. If everybody is living the high life that’s what they feel entitled to do and they may not have a clue how much it really takes to do it.
Lender could have controlled it. They didn’t. They are paying a severe price for it so I say move on.
The real subject now should be how are we going to teach all you youngins how to be mortgage lenders.
OK - don’t throw me off the panel or anything….I am the stir the pot gal…..Radical..see ya.
Diane, I want you to know that I for one like your ’stir the pot’ comments/posts.
Another way to look at it Diane, is that all of those “bad loans” that the lender should not have done have resulted in millions of people who are now homeowners.
I don’t know the exact numbers, but if 25% of Subprime loans are failing, that means 75% of subprime borrowers now own a home when that they should have never been given the opportunity to own. Look at all the folks who grabbed the brass ring.
Even if times are tough for them, they will emerge from this mess as homeowners, first class citizens. Their children and grand children will benefit as well.
Millions of people have increased future prosperity to look forward to, and they have corporate greed to thank for it.
That is another way to look at it, Todd, but from the perspective of a title agent, we’ve got a time bomb ticking on those who aren’t in sorry shape yet.
The subprime refi churn wheel tends to go in two year cycles.
You have the predictable ARM adjustments that everyone is focusing on. The analysts have their eyes on that second wave and that’s what the “plan” is aimed at moderating.
The other cycle we see in the title end is the tax sale notice.
I have yet to see a subprime deal set up with escrows for property taxes. You take a family who is living on the edge and not good at managing debt and let them pay their own property taxes. The hard truth is that most never do. These families have relied upon the ability to refi out of trouble to avoid the tax sale.
I hate to sound all doom and gloom because I know that the wheel will turn and things will settle down eventually.
My only point here is that true homeownership that can be enjoyed in the “American Dream” sense is affordable homeownership.
Our goal as lenders is to help families find homes/mortgages that are priced to match their ability to repay.
So, the lesson for today ah grasshopper, is moderation and tough love. I know it seems foreign but just think of the movie It’s a Wonderful Life. Think small is beautiful. Think little pink houses for you and me. This is where most of us live and we can help the average family back into the average house.
Paul - Thanks.
Everyone here has made thoughtful and wise comments. There are exceptional people afoot in this blog. I agree that the press is to blame. I will add one more culprit to the mix — the non governmental organizations, specifically the think tanks. Where were the position papers that warned of this? These would be the papers from which the press would have drawn their stories. I also blame the education system. People are very well educated in this country, but the education system seems to fall short on the nuts and bolts things of life. I love history, but could we throw in a little personal finance education into the mix? Young people are wholly unprepared for the things thrown at them by real life.
Your comments are on target Wade. It is the system that continues to fail its citizens: lack of proper financial education, lack of accountability on many fronts and a society that values celebrity stalking much more than the understanding of global economic forecasts and what that means for them personally. Let’s focus on putting priorities in the right place…
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