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!