The Blame Game

What happened to make this credit crunch become a major recession?
Mortgage lending is a simple concept: A borrower needs money to purchase or refinance a house, while an investor is looking for a return on money based on different appetites for risk and reward. In the past, banks, thrifts or government agencies played the conduit role to connect borrower and investors. Then everybody started getting involved, including mortgage brokers, appraisers, mortgage lenders, investment banks, servicers, rating agencies, investors (Wall Street) and even the Federal Reserve.

Everybody was winning when house values virtually increased. Things started falling apart when house prices leveled, interest rates started adjusting at much higher levels and delinquencies skyrocketed. That’s when the blame game began. So who’s to blame? Is it the Trump-wannabes, or is it the greedy Wall Streeters? Everybody contributed to the crunch.

Borrowers: Most borrowers remained honest people looking to purchase or refinance their home, but many were caught in the frenzy of becoming the next Donald Trump and the high demand drove house prices to historical highs. Claiming ignorance, many borrowers hoped the government would bail them out… and in many cases, it did.

Mortgage Brokers: They helped borrowers through a maze of different products and complex terminology, and had access to many lenders with better deals for borrowers. Some used aggressive sales strategies, thus misleading borrowers through teaser rates, adjustable rates and other exotic solutions.

Appraisers: Helped assess the value of a house, but some started doing drive-by appraisals or even stated/online ones while working in tandem with brokers to jack-up home values and get loan funding.

Mortgage Lenders: Provided financial solutions to help people own their homes, but many started relaxing the rules and understating risk to try to fund as many loans as possible, reaching the NINJA levels (No Income, No Assets).

Investment Banks: Provided warehouse line of credit to lenders and securitized loans, but started combining high-risk with low-risk loans under a high-grade investment, which made them vulnerable and their small margins were quickly erased when writing-off bad loans.

Rating Agencies: Rated securities to help investors quickly evaluate risk, but allowed Wall Street to gain too much influence over rating (cozy relationships) and did not understand subprime risk.

Investors: Provided liquidity for Lenders and Investment Banks by purchasing Mortgage Backed Securities to manage their investment risk, but became hooked on the profits and did not question their exposure to subprime, and ended up with huge losses when loans started going bad at a frightening rate.

Federal Reserve: Set interest rates and heavily influenced the amount of lending, but leaned too much on interest rates in a bid to keep the economy afloat, and then tried to wash their hands from the crisis.

So here you have it. EVERYBODY is to blame.