Subprime: Who's Fault Was It?
A: Interesting piece here on CNN Money about whose fault it was to put us into this credit squeeze mess resulting from defaulting subprime borrowers. Who's fault do YOU think it is? Lets discuss the list of suspects along with my take on the blame that should be assigned to them.
CNN MONEY: LET THE FINGER POINTING BEGIN!
The Borrowers - 3/5 Fingers Pointed
YES! More than 3 fingers should have been pointed to this group! Stupidity is a scary thing. Well, at least it scares me. When a buyer makes a rational investment decision to buy or speculate on real estate when the numbers just don't work, it's hard to lay blame elsewhere; although in this case there are others to blame.
But for me, alot of the problems had to do with bad decisions made by home buyers who bought either too much house, or tried to jump on the appreciation bandwagon to make a quick profit. In both cases, the buyer is the one to blame. Too often people get emotional and buy something they cant afford, whether it be a car, a piece of jewelry, a vacation, etc.. Thats the person's fault! Good investment decisions are made without emotion and take into account your personal financial situation, job security, and investment strategy. Buying a house with 100% down, very little liquid assets, and a salary that just won't make the payments work is pure stupidity!
Fact is, too many people bought a house and were duped by exotic loan options (I don't forgive brainwashing or being sold a loan product as an excuse here) because they didn't think things through and let their emotions dictate the decision.
The Mortgage Brokers - 3.5/5 Fingers Pointed
About right, but more of the blame should be put onto the managers of these brokers who put pressure on the employees to bring the deals in! You can't blame the brokers for doing their job but you can blame them for misleading the public with ultra-risky exotic loan products that they sold to the borrowers.
Still, in my opinion the lenders and managers of these employees should bear more burden.
The Appraisers - 2/5 Fingers Pointed
It was all Jonathan Miller's fault! Obviously I'm joking. I would even go as far as to lower this to a 1/5 fingers pointed in terms of blame. Appraisers usually do what they can to make the numbers work, no doubt about it, as the entire deal is dependent on it; buyer, seller, re broker, buyer attorney, seller attorney, etc.. If the number doesn't come in, then no one gets their cut of the deal! So there certainly is some pressure. But, fact is housing was appreciating at a very fast pace and the definition of market value is the value that a buyer is willing to pay for a property. So, as long as the comps are somewhat in-line, the # usually came in where it needed to be.
Plus, so many different variables go into an appraisal such as location, school district, renovations, etc.. that it's hard to NOT make the # come in unless it is absolutely out of whack with current local market conditions.
I put the least amount of blame on the appraisers out of this bunch.
Mortgage Lenders - 4/5 Fingers Pointed
YES! With a few phrases I can sum up why: Lax lending standards, lax underwriting standards, the pushing of risky exotic loan products to make payments more attractive, a 'look the other way' attitude towards ultra risky buyer applications, and the incorrect notion that they can always sell the loan on the secondary mortgage markets should things get hairy.
Mortgage lenders and their super loose standards from 2002-2006 definitely played a role in where we are at today.
Wall Street - 4/5 Fingers Pointed
Hmm, tough one. But I'm going to give wall street a break here. They shouldn't be blamed this much. Why? Because financial innovations, such as CDO's and CMO's and other mortgage backed securities that are traded on the secondary mortgage markets, provided the consumer with more loan options? These innovations are what allowed the banks and lenders to relieve themselves of loans so they could provide more options to consumers with the now freed up funds.
While there is some blame to put on the system and all the fees that are made behind the scenes (which many brokerages and hedge funds too great advantage of), but I do not think this was the source of the problems we are in now.
Because of this mess, these secondary mortgage markets are now in turmoil and dried up. This is bringing us back to a state of normalcy where lenders don't have the options they once had to relieve themselves of loans on the books. It is this system that is allowing the free markets to correct themselves, and YOU the consumer are now seeing the end result of this adjustment in the form of tighter lending standards, tighter underwriting, higher rates due to risk and fewer risky loan options at your disposal.
Rating Agencies - 4/5 Fingers Pointed
YES! First off, the unhealthy relationship between wall street bigs and the rating agencies provided for this problem. Just way too much conflicts here to not have a problem.
If the rating agencies were more accurate as to the changing environment, wall street would have been less inclined to take on so much risk; at least I like to think this way. At least it would have minimized the pain as many insurance companies, pension funds, and mutual funds have restrictions on the type of investments they can make for below rates securities.
So, by dropping the ball on ratings, the agencies in essence allowed this risky environment to persist way longer than it should have! Definitely some blame here.
The Federal Reserve - 4.5/5 Fingers Pointed
YES! Oh Alan Greenspan, how your legacy has changed in the past year or so. When Easy Al enacted his ultra loose policy and brought and left the fed funds rate all the way to 1%, he allowed so much liquidity to be pumped into the system that future problems should have been forseen. In addition, he promoted the use of risky loans by homeowners; i.e adjustable rate mortgages.
Sure he was considered 'the man' back in the day and did do some great things to help stave off big time financial distress, many are now blaming the fed for allowing such loose monetary policy for such a long time. As rates started to rise incrementally (mainly by 1/4 point hikes over a 2+ yr period), many are now arguing that Greenspan should have raised rates much more aggressively and faster to counter the growing asset bubble in housing. But that didn't happen and the national housing bubble grew even bigger until its inevitable pop!
Hard to argue that cheap money had nothing to do with it! It changed the psychology of investors and the game itself, and let everyone assume that the housing money machine will never stop printing. Its ironic that today we are calling for the fed to lower rates to help ease the side effects of the problem that arose due to cheap money in the first place!
What do you think? Who's to blame? Anyone missing from the list? REAL ESTATE BROKERS PERHAPS? Did UrbanDigs cause this whole problem? Hmmmmmmmmmmm!
Posted by Jonathan Miller
Thu Sep 6th, 2007 11:35 AM
Good grief, everyone knows its Urban Digs!
or.... its the fact that mortgage underwriting decisions were made by people who were paid for the result. In other words, this is a major conflict and now its not just about subprime anymore. The lending system was inherently conflicted by self-dealing and finally investors who buy the mortgage paper, finally realized it. Its never been about a housing bubble, it was always about a mortgage bubble.
Posted by Noah
Thu Sep 6th, 2007 11:42 AM
there you go! Cant argue that JM!
Posted by gaila
Thu Sep 6th, 2007 12:09 PM
What about the current tight money policy of the Federal Reserve? Doesn't that play a role in the current scenario? I agree there are many people to blame and these conflicts need to be considered. Those who were involved are suddenly taking the moral high ground and finger pointing but they have already taken their profits. Not everyone was involved and now it looks like the whole country is about to be pushed into recession because of this tight money policy. Even inflation would be better than that.
Posted by newbie
Thu Sep 6th, 2007 12:12 PM
global warming!
But seriously, a main driver was the lack of regulation for mortgage lending. Many of these companies are outside the realm of state & Federal bank regulations that place emphasis on lending practices and credit standards. Also, borrowers who either made bad decisions or didn't have the sophisticated knowledge to understand what they were getting into.
Wall St. only exacerbated the situation by exploiting a market opportunity but also added liquidity. As for the Fed, there were many benefits to low interest rates; Back then people speculated that Greenspan was holding up the housing bubble, but low rates did enable many to consolidate and pay off their debs. Plus enabled many to buy homes who couldn't previously afford (and are still homeowners).
Forclosure procedures and regulations differ for each state, so each area has to evaluate what to do.
As for rating agencies, they always get blamed after every major market event.
Posted by newbie
Thu Sep 6th, 2007 01:42 PM
galia, how is the Fed's monetary policy tight? Lowering rates wouldn't help the situation one bit, probably make things worse; besides rates are still at historic lows. As it is, the Fed already lowered the discount rate (more of a symbolic gesture).
Unfortunately we all want to have our cake and eat it too. The rest of the economy is still showing signs of strength and it's unclear whether the Fed's policy would create an economic recession.
Posted by russ from sc
Fri Sep 7th, 2007 08:21 AM
Noah, everybody knows the reason - lenders' greed + buyer's lack of knowledge and naivety. Sadly, it will happen again and again. The good news for those who read Urban Digs, however, is that they will be less likely to suffer because of the knowledge and naivety parts.
Posted by ril
Fri Sep 7th, 2007 11:05 AM
what about the institutional investors whose appetite for subprime backed securities created the market in the first place?
Posted by George Todd
Fri Sep 7th, 2007 11:35 AM
I'm a Realtor in Denver. I'm very surprised that Realtors did not take any blame. I give them 3/5 fingers. We knew that what was happening was not based on sound business models...but we closed them anyway.
Posted by gaila
Fri Sep 7th, 2007 04:04 PM
I am thinking it would be a good idea to lower rates slightly to end the panic and so those needing to refinance out of ARMS have a bettter chance to do so. We are OK here in NYC so far and yes rates are historically low. I am not sure how accurately historical rates compare to today because so much has changed and it is a global market place. To lower the rate even a bit would help iwith the psychology of the market place. If they could address the panic over money supply and restore some confidence it would help. If the dollar dips a bit it will be difficult for imports but good for our exports and could benefit the trade balance to some extent.
Posted by ishmael, lt jg
Sun Sep 9th, 2007 01:42 PM
You did miss the PRESS. nytmes is a bit better than most, but WSJ might as well have been Murdoch's all along. Throw in ECB, BoJ, and since Fri. BoE with the FRB.
If rings of Hell ratings count, I give Easy Al circle 9, ring 2, Ring 8 lenders and appraisers, but borrowers get circle 5. Of course Supply Side Jesus absolves all.
Give the ninja borrowers a break for understanding Wealth of Nations best (see B Ehrenreich, huffpost, 8/22). Say a panhandler named Adam meets a CFC rep named Angelo on the street and asks for a buck. Angelo has a better deal: $200k loan on a place that was selling for $140k a year ago and should be worth $280k next year, so that in 12 mo. Adam gets another $80k. Angelo also gets a percentage. The only drawback is a couple $k a month, but Angelo will box up Adam's loan with a 1000 other ninja loans into a CDO, sell the servicing to Vinny and offers the CDO to Nicolas at Paribas. Nicolas is a Poly grad and does due diligence and buys the CDO anyways. 2 yrs later Adam realizes he has a place worth $160k, and sees living in recent SUV purchase as a viable alternative. Vinny and Angelo accept deed in lieu of foreclosure, loose their street cred, but retain nominal collateral and previous cuts. Nicolas is forced to go to the ECB for spare giga-euros.
Posted by anonymous
Sun Sep 9th, 2007 03:38 PM
Just wanted to drop a comment on NY real estate in here, even though it's off topic. I went to 3 open houses today and they were all dead. Is it still a bit early to have a very active real estate market? I guess on a day like today I would have expected to have more people running around now.
Posted by newbie
Mon Sep 10th, 2007 11:56 AM
gaila, your argument makes sense but the Fed already did that by cutting the discount rate.
If they cut again it would not address the main issue. So many other factors at state that a mere rate cut wouldn't prevent the country from plunging into a recession
Posted by Maggie
Mon Feb 4th, 2008 07:34 PM
Your all wrong. While it is a combination of all of the above the primary problems are the banks themselves.
I sell real estate and also originate loans.
Lower rates drove housing prices up, thus allowing borrowers (ordianary middle-class & elderly citizens)to refinance their own homes and use the "ficticious equity" to pay-off all their debts aka credit cards.
Every bank that was handed a credit card pay-off turned around and sent the borrowers a new card usually raising and giving them new much higher credit lines! Thus the vicious cycle began, but of course most reasonable citizens began to see the credit card game and thus began the bankruptcy filings.
When ol' polyester pants Senator Grassley stepped in, it was only to help his contributors The Banking system, the only people in America that he and other politicians represent, not the people who elected him, no...the ones who made him rich!
He did this by stopping bankruptcies which protected borrowers by allowing them a way to get back on their feet, he tied their feet and hands so they were strapped with debt.
And God forbid the debtor would loose his job or have a medical crisis, which a lot of them had and contine to have.
Then the third round of problems began, the tax assessors started their money grabbing, by raising property taxes to adjust for those high selling high priced homes.
Then the insurance companies jumped on the credit bandwagon by trippling the insurance rates, and thus the typical $850 house payment has esclated into a $1300 plus payment.
And it only continued with banks becoming profitable by forclosing, etc, etc.
I'll bet most borrowers didn't know that by forclosing the bank just files a claim and wallah.....80% of the borrowers balance is returned by the good of Fed Gov. or "us taxpayers"
and on top of that the banks get to keep the house and sell it, so it's a win-win for the banks, so why would they try to work something out with any borrower.
Who is at fault??????????? THE BANKS AND THEIR GREED.
Now it's slapping them in the face.
Houses not selling, over taxed properties that superseed the bank.
Now guess whos paying the taxes on those thousands of forclosures that are sitting month after month, year after year?
The ones that are now whinning about loosing money!
And what goes around comes around!