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.