Mortgage Confidential: Who is culpable for the credit crisis?
Filed under: Debt, Real Estate, Fraud, Recession, Mortgage Confidential
I got this email today (a good one) from a reader wanting to know who we should hold responsible for the mortgage "crisis."
Q: David: Can we hold our political leaders responsible for the financial crisis comprising misrepresented mortgage-based financial vehicles, like CDOs, derivatives, and other mortgage portfolio "packages" or is this so-called crisis just the by-product of a "natural" inclination of the mortgage market to correct itself in accord with principles of supply and demand? In other words, is there a specific group of humans culpable for this crisis?
A: Good question. Here's my answer.
Your Senator or Representative had nothing to do any of the instruments you describe. Nor did Bush. I know Dick Cheney and Karl Rove are easy targets but they didn't have anything to do with it either. Heck, my San Diego Padres are in last place this year but just being in office doesn't make one responsible because it happened "on your watch." The Padres simply have no power in their lineup.
Wall Street did it. But it had to have a strong supporting cast. And mortgage companies are not intentionally correcting the mortgage market, what is happening is that the mortgage market itself is correcting. How?
There are no longer any buyers of alternative and sub prime loans, and lenders that made them are out of business. That's pretty much the harshest punishment a business can have. Go ahead, try and find a sub prime loan. You can't. Are those lenders culpable? Sure they are, but so are the investment firms that cleverly hid sub prime MBSs in CDOs, so are the bond raters, so are the loan officers, and also, let's not forget the consumers who knowingly lied on their loan applications just to get approved. Bush said Wall Street "got drunk" and I think everyone can understand that.
Remember, home values were skyrocketing, home ownership hit record levels and interest rates were low...very, very tempting. The loan officer could say, "Aw, don't worry about it! If you get into trouble you can always sell or refinance down the road!" No you can't when values fall. But home values hadn't fallen for years, so if history was any indication, then the buyer was likely to be home free. (no pun intended) Home buyers became speculators and all this happened in a relatively short period of time. The market corrects itself, with or without the government, and that's what we're seeing today.
Lenders are "sobering up" and doing odd (tongue-in-cheek) things like making sure you have a job and can afford the loan. I know that sounds harsh. So yeah, there are a specific group of culpable humans and they're wearing different hats. But they all had the same traits...fear and greed.
That's my opinion and I'm stickin' to it.
Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.
Reader Comments (Page 1 of 2)
7-29-2008 @ 6:04PM
gloria said...
Don't blame our elected officials. People are in over their heads because they got greedy, purchased homes they never could have afforded. No common sense was used. No one is guaranteed that they could or should own a home.If seems everyone wants to blame others and not take the blame themselves.
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7-31-2008 @ 9:29AM
Lena said...
I can see why you might feel that way, Gloria, but I can tell you from personal experience that it isn't just that the homeowners wanted to buy homes they couldn't afford; my husband and I started a small business, we used the home, which was paid for, as collateral for the loan. The loan officer had the home appraised, and of course, the appraisal was much higher than the home was actually worth. When the new business expenses were driven higher during construction by a combination of thievery and greed on the part of the city and the bank, we were forced to borrow more from the bank, we were in the middle of construction. Because we needed more time, the bank decided to make the loan an adjustable rate. Our credit score was 850, but because the loan had to be redone, and you can't get a second loan from another bank when the first bank holds all your collateral, so we were forced to accept their terms. We lost our life savings of over 550,000 and our home. How could we know in advance that the bank, which should be in the business to protect their assets and ours, would try to do this to us? How could we have known in advance that the city would require that we go beyond the city codes during the building process? We couldn't have. Hiring an attorney to fight them would only have put us in deeper debt. So we were forced to declare bankruptcy and start over. I'd like to know where the consumer protection agency is hiding. I'm sure that if this happened to us, and we are usually very conservative people with our money, this could happen to anyone, and it obviously is. I don't think that the American taxpayer should bail anyone out. If you think that will help I think it won't. It would literally be helping the banks instead of the homeowners. We did try to negotiate with the bank in this matter: they wouldn't even discuss it. We offered them what was then fair market value for the home and a new mortgage: they weren't interested. Turns out that the airport authority wants the property for an expansion. Isn't that interesting.
10-07-2008 @ 11:51PM
Master Gunnery Sergeant said...
First Stupid they're the ones who got us in this mess and you say don't mess with them . Please give me a break. Look in the mirror can't stand yourself can you ?
7-29-2008 @ 9:05PM
Toney said...
I do not thing sub prime was the problem greed was, sub prime gave people with credit issues a chance and they went over board. There should be numerous program for people to purchase a home, it is the american dream now to shut the doors on honest hard working people, to say whom should and should not have a home is wrong, if you can pay rent you should be able to own a home, bad investor not bad purchaser was the problem. So do not pentalies good people help them, everyone now is afraid to even think of own a home because people will judge them, and tell them you are not worthy, now I ask is that the american way
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7-30-2008 @ 11:43AM
Noel Freedman said...
A first time buyer was the domino that tripped the dominos that led to sale upon sale as sellers once sold became buyers to move up another rung on the house ladder. -This all stopped when first time buyers were unable to qualify. Nationwide the real estate housing industry was nothing but a giant contingency: So it was and so it shall be forever more.
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7-29-2008 @ 9:20PM
David Romano said...
How about some of the blame going to the actual buyers and sellers. All those folks looking to cash in on the ever increasing value of homes share some of the responsibility. "Flip" your way into early retirement seemed to have been the mantra of many. In the end there is plenty of blame to go around.... and speaking of History.... this has happened before folks and will happen again....
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7-29-2008 @ 10:22PM
terry said...
Yes I agree with Gloria.People wanted the big house and some money and a scrupolus loan officer was ready to give them a loan.When every level of the loan process from broker to bank to other higher money providers made a quick buck with NO INCOME proof a quandry will always happen.When I bought my first house 20 yrs ago a loan process took 6 weeks and we had to provide proof of income-when did that stop?? Blame the loan agents that approved loans that they knew people could not pay back and the homeowners for buying a house they could not afford.Stay within your budget and we will all be better off.
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7-30-2008 @ 10:11AM
Irving Green said...
Greed at all levels resulted in the falsification of loan applications, bundling up subprimes into collateralized securities at the risk of the purchaser of the securities, and greed of the bankers who supported the system to get higher returns. \
Federal Reserve made cheap money available and HUD and Congress supported the housing and mortgage industries. They used the Fannie Mae and Freddie Mac organizations for political contributions and lots of multi-milllion dollar salaries jobs for their friends, relatives and political cronies.
Biggest intellectual fraud was the belief that high value homes were great for the middle class and suitable for almost everyone. This resulted in the self inflation of the value of the homes by the home owners and everyone else who profited by overpriced realist for high commissions and big values for all kinds of loan products by banks, mortgage brokers, savings institutions and the US Treasury carries a big responsibility for some of the problems.
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7-30-2008 @ 10:11AM
Tom said...
Agree that there are many parties to pass the blame around to. Even though not directly involved, I would say that certain government officials were very aggressive in working to find ways through Fannie Mae and Freddie Mac automated underwriting engines to increase the homeownership rate in the US. The mortgage lending industry in general knew that many Stated Income loans had misrepresented income and chose to "look away" as long as investors were willing to buy the loans after doing file audits on a % of the loans and still agree to purchase. With the new Housing Bill now signed and many borrowers getting a semi bailout of part of their loan amounts, I wish there were a way to still punish those that lied to begin with, vs letting them now possibly qualify at a lower loan amount and stay in their homes. Somehow they should have to pay a premium for lying first time around vs those that did not and got into trouble because of the mortgage type they got into originally. A mess for sure!
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7-30-2008 @ 10:27AM
sailor said...
Ohhhhh don't let the Government off so fast! Three things I can think of as the local Governements got into the real estate mix. As those price increases hit the revenue office in taxes collected. Someone said lets appraise the properties to the new comparable market. That gave everyone faith in the new value of the new higher priced homes. If the government said those homes are worth it, then it must be true. That's our government working against us.
Second was back in 2002-3 time frame it was made into law that the government could sell the properties they owned at market value. That boosted the fast track title process and they now became property speculators themselves. They can hold certain properties and sell a few to investors. When the Comps come up in that area they sell for a larger profit. All on the back of the working person. They see an opportunity to own, buy it, work it, then the government comes in and appraises it higher and sells thier property at that rate. The government has a job and a home and lots of time to play with vacant properties.
Lastly, the local and state governments approved and permitted sprawl of more convieniances and PUDS. These areas already had the failing shopping centers and strip malls. But they allowed more of the same in more areas. Which bolstered more sales at higher market prices. Which meant higher tax revenue. Meanwhile, the old high market homes were falling and the homes start to look like eyesores compared to the newly built homes. So the demand went up for the new houses at the new prices. The old home owner was now either forced to move or live in a declining area and drive further to use the new services somewhere else as his areas and services and still are looking relics and non useable.
So who really can say the Government had nothing to do with it? The Government was and is just as guilty. We work all day take care of our children and families thinking that there are smarter people looking out for us. Yeah right!
One last thing about our Government I see a lot more happening. The taxes and money spent on energy from them. Why? Because they now use the government cars and police cars a lot more. Since the gas has went up. I look at the vehicle tags and see more government vehicles and police cars filled with families in them. Sucking down our tax money enjoying roads trips we opt out of because of the gas prices. But because they have our trust and use our money they say we can afford to let them ride for free.
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8-05-2008 @ 9:13PM
N. Devine said...
This administration and congress significantly contributed to this fiasco/crisis. But they weren’t the only ones. Start at the top.;
• Federal Government (executive/legislative) was taking credit for an expanding economy and increased levels of home ownership. They turned away from government analysts who said that things weren’t right and instead further deregulated Wall Street to keep their major campaign contributors happy. Unfortunately, the expanding economy was due to people refinancing homes that were artificially increasing in value and then paying off bills (college loans, car loans, medical bills) or rolling money back into the homes to update or expand. The increased levels of home owner ended up being a ponzi scheme that federal regulators should have seen coming. This administration was just hoping that this debacle wouldn’t happen until the next administration.
• State and local governments loved the phenomenal revenues generated by new home sales or inflated existing home sales prices. They could reassess property values at will and take builders fees that were supposed to cover future infrastructure costs (roads, schools, etc) and spend it on current projects. Now the surplus is gone but the infrastructure requirements still exist but are now unfunded. Anyone could look at the California building and tax cycles in the 1970’s that lead to proposition 13 being passed as well as how developer fees stopped coming in when the building bust stopped in the 1980s. If anyone should have been on edge raising a red flag, it should have been state and local governments....if they had bothered to do any research into the last 30 years of booms and busts.
• Loan companies were able to make enormous profits up front even though any analyst with a high school education could see that making sub-prime loans was unsustainable. They simply were playing “hot potato” and hoping that someone else would get stuck with the bill. When you take a look at Wall Street profits and huge executive bonuses, you see this clearly. The head of Merrill Lynch walked away with over $100M even though he destroyed the company. The heads of fannie may and freddie mac both made salaries of $15M (not counting bonuses). They didn’t care.
• Loan officers didn’t mind that they were giving out bad loans. They all made their money up front loan by loan. It wasn’t their concern that the loan would end up being bad. As long as their companies turned a blind eye as to what was going on (And encouraged them), they didn’t care. And if the home buyer was uneducated or unsophisticated enough to understand what was going on, so what?
• Real estate agents didn’t care either. Their 6% was based on the sale price of the house and if there was an unrealistic bidding war, it just made more money for them. If a house price was artificially inflated, the commission still went in their pocket.
The only people not making money on this are the taxpayers who is having to bail out wall street and the investors who were stuck with the "hot potato" when they bought bundled “investments” that included sub-prime loans that everyone else knew were near worthless. Just like with the savings and loan bail-out of the late 1980s that cost the taxpayer over $500B. And just like then, no one who caused or enabled the crisis went to jail or paid a price. The primary payer still ends up being the middle class American tax payer.
Now let’s study some history, do some proper business analysis and put in effective regulation at federal and state levels so we don’t repeat this con game again.
And unlike the savings and loan fiasco of the 1980’s let’s go after the government heads that enabled this crisis as well as the corporate heads that ignored their corporate leadership and management responsibilities in order to enrich themselves.
If the taxpayer is stuck with the bill, then government, both executive and legislative, should ensure that the lessons is out there for any future con artist/corporate head that thinks they will be allowed to do this kind of thing again with no penalty (but vast riches) against them.
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10-23-2008 @ 3:32PM
PJ said...
well said!
10-23-2008 @ 5:23PM
Anne said...
Right on, N. Devine.
Mr. Reed is only part right. The fact remains that this administration's culture of cronyism and unprecedented corruption at ALL levels simply extended to and included Wall Street. The Bush administration's wreckless squandering of taxpayer money for corporate handouts, no-bid contracts, and governance by and for the benefit of the corporation first and foremost has enabled an inevitable economic perfect storm. Deregulation of Wall Street is most definitely at the heart of the problem.
Moerover, the fact that so many homeowners lost their jobs or simply could not find a job that could support even modest increases of their mortgages is a clear sign the the entire economy, not just the credit industry, is in deep trouble!
With regard to the S&L crisis under Bush1, let's not forget the Keating 5, one of whom was Senator McCain. Corrupt good ole boy to the core.
7-30-2008 @ 3:51PM
TB said...
Excellent response. In fact, we are all to blame because most of us were getting in on it and betting on the upside. Although, you can still do everything correctly and still not win at this game. I do think that it is wrong to bail these people out as we are setting ourselves up for another fall down the road. People are learning over and over again that they can take risky chances and lose, and then the Government will come along and bail them out. This is not a good practice and teaches people to be irresponsible.
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7-30-2008 @ 7:33PM
Mary Anne said...
Whoa, wait a minute. You can't blame the appraisers office for the foreclosures. They don't tell people what to sell or buy a home for. Put blame where it belongs. Lenders, realtors and greedy and not too bright home buyers. Instead of investigating they believed whatever the lender and/or realtor told them. To buy our first home we had to have 20% down. What's this 80/20 and 125% equity loan. Let's get smart people. Now because of this the reaction is over kill and very few can get a home.
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7-30-2008 @ 9:34PM
steelcrazy said...
If Wall Street got drunk, it's because the Bush administration spiked the punch bowl. Unwilling to assume the political fallout from the collapse of the stock market bubble, they dropped "real" interest rates to zero. Then, riding the political bandwagon of the "ownership" society, they encouraged lending to people who simply could not afford to be homeowners. This all sparked an unprecedented (and much appreciated, by the Bushies) housing boom and led inevitably to Wall Street's conclusion that "risk is yesterday's problem." Securitizations of income-generating assets are as old as the hills. CDO's and MBS's are just a logical extension of the process, given the government's blessings. Fear and greed are also as old as the hills. Nothing new there. Same problem; different day.
Sure. there were unscrupulous lenders and mortgage brokers and dishonest loan applicants and greedy investment bankers who paid themselves huge compensation packages when the going was good. But none of this would have happened if the administration would have dealt with the problem of asset inflation the first time around. Instead, they simply substituted one asset bubble for another; only this one is much worse, and aggrivated by the fact that we have the largest fiscal deficit in history driven by an ill-conceived and poorly executed war.
Mr. Reed, I respectfully dissent. The so-called "easy targets" had everything to do with this....only now they're diving for cover. Don't let them off so easy.
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7-30-2008 @ 11:45PM
lambscapes said...
My beef is this; Why should myself or my family be expected to pay for other peoples greed and ignorance? We played by the rules; We didn't buy something we couldn't afford (figuring on one spouses salary to boot), even though the bank told us we qualified for twice the amount we borrowed, we put down 20%, we didn't refinance to buy more toys we couldn't afford, and we didn't treat our home as an "investment" to flip or refinance to generate cash.
I do not think there should be ANY bailout for those that were so foolish(they should educate themselves better before making such a purchase). And all these banks, loan officers etc. who committed the lies should be jailed and all their assets taken. Let the banks fail.
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9-29-2008 @ 4:36AM
Barbara Hayes said...
But who is to say who was and who was not playing by the rules.
I always paid all my bills my property taxes everything I invested 250,000 into a business that went flop thanks to flooding and loss of all my databases and when Fema came in they gave me a measly 1007.00 and sent me to SBA. Did they give me a loan no I didnt meet their terms as qualified because my taxes were not up to date due to still in the process of settling my two deceased parents estates. I have 3 children and one grandchild to support and I had to get a loan to survive. I was sent to a lender through someone and they asked me for nothing no documents . The man who came to appraise my home was here all of 10 miniutes. I asked if I could submit my ability to repay through documentation and even asked if they could use an underwriter but they said that wasnt necessary.
I requested 200,000. by the time I got the loan it was 160,000
and I was stuck with an interest rate of 9.875 1 yr prepayment and I was expecting to be getting money from a settlement of a wrongful death lawsuit as my dad died from melanoma and I thought I could handle this loan for at least the year and when the prepayment penalty was up I would either have received the settlement I am awaiting or I would be able to sell my home and pay back the lloan in full. I never expected any of this to happen and then to top it off my youngest daughter who just gave birth august 20th lost her son on the 28th after they had to do open heart surgury and I had just invested a great deal of money to renovate an upstairs apartment furnish it and ready it for the child and now found myself paying medical funeral and other expensies. I am just sick so sick because I never ever borrowed anything never had credit nothing always paid my bills and due to the fact I paid everything with debit direct from my brokerage accounts. Guess what my credit score showed no valid credit history and basically caused me the situation I found myself in because they claimed due to my low credit score which was about 570 at the time I didnt qualify for any other type but an undocumented loan. I could have proven to an underwriter that I was credit worthy and received an honest loan now I stand to loose my home. Who do I blame I blame the entire goverment , banks and everyone that we are suppose to feel is treating us with honest fair treatment and those that we have entrusted with out money the ones who
instead did things out of greed not the way it was once done when our parents were young. IT was then you could trust your bank and go to your government and get help. And what gets me is people who just came to this country who are living on welfare and getting loans for business and homes and more
are not being blamed at all. Just look at who owns all the local businesses and just look at who is buying all the real estate.
And now they will have even more when american families whose moms and dads built the bank systems with their savings
and fought in wars to save and protect this country are being
made to loose the only thing they have their homes. Im sure that you will be seeing even more foreigners step right into these homes as they seeem to have all the money not us americans. We get nothing from the goverment not loans not grants not anything. We give and give and give I paid 80,000 to the IRS ini 1997 and 36,000 in 2005. Why am I in this position. Where will me and my children and grandchildren go when they take my home. I am ready to just give up I Am so sick because I dont deserve to be in this position I really dont.
And who can I turn too absolutely nobody that I know for a fact I can trust Ive been take by far to many people and most of these people were those I thought were there helping me because theat is what a person and business , bank and government are suppose to do. Not help themselves but help each other. We are all left to fight for ourselves and I dont feel we stand a chance I really dont Ive been fighting to correct wrongs for years not and its just not getting me anywhere that is now obvious. GOD BLESS US ALL
8-09-2008 @ 9:19PM
FINANCIAL ADVISOR said...
I have a company that provides loan remediation and has a 97% success rate to avoid foreclosure.
This is very important as the CEO of the company is a former Chairman of HUD and they intervene with banks to save your being removed from the house.
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9-29-2008 @ 12:16AM
bARBARA hAYES said...
We are sick of hearing we are hear to help you we can do this for you and we can do that for you. We get constant solicitation by even those we think to be reliable and trustworthy but I ask you because at this point I just dont know Who is it that we can really trust. The way I see it is the only ones are each other those of us who are stuck in these situations and we need to fight for each other and with each other for our own protection. The governemnt is suppose to be for the people by the people meaning officials should be working for the people carrying out the wishes by being the representative for the people . But yet I do believe for along time everyone is simply working for themselves and doesnt give a hoot about everyone else. Its like monopoly everyone is struggling to buy up as much as they could and be at the top of the game. Look at what they do to the american people with the lottery. There are so many scratchoffs out there that prey on the people who have a weakness to this because its a dream to be one day rich so they take the bait and spend all their money on these tickets and the governemnt knows it they run it . The states run it and they take our money. Wake up people we are weak as americans and thus we are taken advantage of and not only do they want our money through taxes, and through misleading us into housing and mortgage crisis situations like we have now. Threw lotteries geared to mislead us to believe we have a chance to be rich. Think About it. We need to start making the decisions not letting the elected officials speak for us because they are not doing so.
We need to stand up for our rights and stand together because if we do not we will fall because without number we have no stregnth. I just wished I had gone into politics like I wanted to years ago I know one thing I would have seen to it many that have held offices now for almost 30 years some of them would be out on their butts and people that were actually doing what they were suppose to be doing would be in office. Do you ever ask what do these assembly people do that we elect. Well some are honest and truly try to help people this I know for a fact but the number of them is few and far between. The others simply put in a street light every now and then or attend a social event that gets them noticed for participation and they have earned themselves beautiful homes cars and you'd be shocked to see their bank accounts. Yet whose fault is this its ours because we simply allow it to keep on the way it has been
and just like trained seals we march to the polls and cast our votes why..............Is it doing anything for us . I say we cast a vote to take back our government and our communities and our
money and the only way to do this is to vote out of office everyone and take it over ourselves. Can it be done probably not but that would be the only way to correct many years of neglecting to see a problem and doing something about it.