Credit Crisis - Let's Play the Blame Game !
Great Post by James Wexler
Sub-prime lending and easy credit are widely considered the primary factors that caused the expansion of the housing bubble and the expansion of housing prices that led to the ultimate implosion of the real estate economy.
However,
....what are the reasons that caused the mortgage crisis?
and the collapse of Bear Stearns, IndyMac, Fannie Mae and Freddie Mac and a free-fall in housing prices in greater Phoenix and in virtually every part of the country.
- Borrowers - The vast majority of borrowers where honest in their loan applications. These are the neighbors that are hardest hit as unqualified buyers walk away from next-door homes as prices fall and interest rates adjust higher. Though, remember, Buyer Beware! We are quick to recall that old adage until it happens to us. However, buyers must take some responsibility before they are quick to point blame.
- Lenders - different than mortgage banks. Most lenders originate loans to consumers with the plan of immediately selling this loan to another institution. Greed by lenders to get paid a commission led to "liar loans' and a wide disregard of borrowers ability to pay for the mortgage.
- Banks - Lack of over sight by management, low underwriting standards and poor explanation of borrower risks are key factors to the sub-prime meltdown as banks quickly packaged loans and sell them to Wall Street investment banks and Hedge Funds for high rates of return.
- Wall Street -Investment banks pooled these CMO 's (collateralized mortgage obligations) and sold to their investors with high rates of returns. However, the ability to use leverage allowed banks to buy more than they could afford. When it was time to pay investors the value of these funds was virtually gone.
- Government- In a odd twist of fate, the government is taking little criticism or pointed fingers of blame. However, we are a Country built on borrowing; not Savings. The vast majority (some say more than 80%) of our gross domestic product (GDP) is from consumer spending. This has been great for economic expansion. However, lack of now planned oversight of allowing too many to buy what they cannot afford in order to support growth, may have come too little too late.
We all have our opinions of who is to blame.
Unfortunately, there is no one answer. No easy answer. No easy solution.
As the President pointed out, "it took us some time to get into this and will likely us some time to get out"; .... not comforting news, but likely the truth!
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