As the mortgage crisis unfolds and expands, you see a lot of blame laid on subprime loans, and more specifically, people who signed up for subprime loans. In fact, subprime was voted the word of the year. People are clearly responsible for the contracts they sign, but simply blaming people who took out mortgages they couldn’t pay back is the wrong way to look at the problem.
Last month I talked about the similarity of the mortgage crisis to the junk bond crisis. One of the most important similarities between that implosion and this one is that the entire market was driven not by demand for loans but rather demand for investments. Here’s the question you rarely see asked. Why were banks so eager to sign people up for such incredibly risky mortgages?
The reason is that they had already originated as many good mortgages as they could, and there was still more demand for mortgage backed securities. So mortgage brokers had to find more mortgages to sell, and the easiest way to do it was to loan money to people who really shouldn’t be buying a house, or to convince people to upgrade into larger houses that they couldn’t afford by offering them low monthly payments.
So when you search for the source of the crisis, look in the direction of the big investors who were willing to buy up any old mortgage backed security, no matter what its risk profile was. Those people put billions and billions of dollars on the line, and funded an avalanche of loans sold to the confused, the ignorant, the overly optimistic, and the dishonest.
As the economy continues to go badly, you’ll see more and more people blaming the same people who are losing their homes and watching their financial futures go down the tubes. And while I agree that they do bear responsibility for the decisions they made, they didn’t create this crisis. In many ways they’re the victims.
January 25, 2008 at 4:27 am
Banks should be required to service their own loans. Any time you separate risk so far from the source, you will end up with a bubble, and bad decisions all along the way.
But in the end, the banks and Wall Street boys will get away with it all, as the poorer people get screwed over, as they all do.
In my opinion, 90% of Wall Street needs to be in federal prison right now.
January 25, 2008 at 10:16 am
I would also argue that this problem was confounded by the rapidly increasing prices/values of houses between the mi-1990s and today. I watched as houses became more and more valuable each year and wondered how that could be sustained — yet so many people were buying because the banks loosened their mortgage requirements, likely because few people could afford a mortgage under the old requirements.
Secondly, the banks made it easy for people to roll their houses over into new mortgages with better rates, which freed up money that the homeowners could spend, which they did — which is partially why the economy has been touted as “good” for the past 5-10 years. But now people have maxed out their “house ATM” and can’t withdraw any more money from its value.
It’s a recipe for an economic disaster. I’m actually happy that I do not own a house right at this moment but will surely be looking to buy on the cheap after the market is flooded with homes that people cannot afford.