Who Should We Find Responsible For The Subprime Mortgage Lending Crisis?
Who Should We Find Responsible For The Subprime Mortgage Lending Crisis?
I want to preface this article by saying, I’m not 100% sure who we should blame for the Subprime Mortgage Lending Crisis, the lenders or the borrowers which is why I want to attempt to fairly give arguments from both sides. Even today this is a heavily debated topic and I agree with points made by both sides. So I want you to decide as the reader, who you side with, and if you want to post in the comments below. This article is meant to shed light on who we should hold responsible for the Subprime Mortgage Crisis, the lenders or the borrowers, or someone else?
The Lender’s Side of The Argument
The lender’s side of the argument almost completely revolves around the idea that people need to educate themselves before they go into a bank and take on such a series contract, like a mortgage. Even in many cases where the information was fully available to the borrower, they signed the contract even though they didn’t understand it. If you agree with consumer protection, the lenders should have stopped the transaction from taking place, but many believe that we should be free to make all decisions even bad ones. The truth is that these are companies, however and their only job is to look out for themselves. This lending is an especially weird occurrence because the force which usually stops this kind of behavior from taking place is that it would not be beneficial to the company, but mortgage brokers and the companies lending were making so much money that at the time it seemed like a good idea.
Another way the lenders justify their subprime lending practices was that they were getting pressure from higher up in the company to lend as much as possible because there was such a demand for the financial products on the markets. This is the old “I was just following orders” excuse, but there truly was heavy pressure from companies onto the brokers to loan as much as they could, or they would find someone else to do it. At the time most mortgage brokers legitimately didn’t think that they were doing something bad. They didn’t try to tank the system, they truly believed that the booming real estate market would be able to cover any losses if someone foreclosed on a property. We found out that this was a horribly wrong assumption eventually which lead to billions in toxic assets on the bank balance sheet worth nothing. Ultimately if you think that the consumer should have been diligent and did the required research before they took the mortgage contract, you might side with the side of the lenders
The Borrower’s Side of The Argument
On the flip side, the borrower’s side of the argument claims that it is a company’s duty to inform the customer and the government’s duty to provide consumer protection so mortgages that were created with a high chance of failure wouldn’t be possible. Borrowers also claim that many of the brokers specifically targeted low income and uneducated applicants so they could get a larger commission. In addition, the extreme leniency of the various types of mortgage products that were being offered at the time, for example not having to even show any income, should have been against the law. While not all brokers were predatory, there were many that were, which did target the low income and uneducated, but at the same time there were many borrowers who knew they couldn’t afford the payments on the house and figured they would just resell it for profit. Consumer protection is a tricky subject , because at what point does it stop becoming protection and start becoming a barrier to entry. For example up until this year only Americans with an income of 250k + or 1,000,000 in assets (disregarding primary residence) were able to invest in private companies, many hedge funds and other investment vehicles, all because of consumer protection.
Many people say that a fool and his money soon part ways and it’s hard to wonder if people who signed into these mortgages would have lost money elsewhere on credit cards or payday loans. I think that the mortgage prices that were way to complex for anyone to even understand should have never been offered, but is it the government’s place to protect a private entity from not offering them? Theoretically in a free market banks should not have offered the products because they were too risky and would have lost them money, but this force did not prevail. Whether or not you agree with the borrower heavily comes down to what degree you think consumer protection should play on your everyday life and how the government should police products.
Conclusion And Some Of My Thoughts
Like I said when I started the article I don’t think I find either party solely responsible for the subprime mortgage crisis that occurred. I believe both parties over leveraged themselves and took risks that, in hindsight, were insane. The world market wanted more mortgage prices and people all around the world were willing to pay large amounts for them, so banks and mortgage brokers supplied the demand that was out there. Unfortunately the mortgages they supplied them with were garbage. In this regard I blame the credit rating agencies, whose actual job is to rate them properly , for not doing their job. I also believe that the specific brokers and lenders who were predatory lending were morally wrong, but I’m not so sure that they constitute acting criminally. Maybe under current laws yes, but im someone who does not believe in consumer protection, mostly because I believe that people should be able to spend their money as they see fit on any product they see fit. We see 1000 scams on the internet a day, yet we don’t fall for them because we know they are scams. I think trusting any entity that is making money off you is foolish. Im interested to see what other people here think and why.
The subprime crisis was not because banks couldn't collect money on mortgages. It was because mortgage derivatives were overrated by rating companies and risk was not properly evaluated. So there would be several layers of derivatives where investors were tremendously exposed to low grade debt that was certified as high grade.
It is similar to walking into a casino and being told your odds of winning are 99 of 100, but in reality they are 1 of 100, and much of the economy is predicated on the accuracy of the risk estimates, which were not only wrong but generally lies.
To even bring the borrower into the equation completely absolves everyone who sold or certified derivatives that they knew were toxic.
The narrative that brings this question into our consciousness is part of a larger theme that attempts to blame low income people for society's problems.
When writing the article I was debating going in deeper on the poor performance of the rating agencies, especially with regards to how they vastly underrated the amount of risk that traunched mortgage products had. However I figured that the base of the problem was what I would address, which was that ultimately subprime mortgages were being offered in high numbers. Youre right that if the mortgage products were properly rated, we would have seen a far less amount of investment into them, but at the time the speculation on the housing bubble never crashing was so crazy, that people were okay with defaults because they figured the price of the house was always going to keep going up.
What you also need to consider was the way in which debts were consolidated over and over again and re-sold as financial instruments so when those debts spiralled there was no control so the problem was exacerbated by a factor of double and triple the original bad debt.
The artificially low interest rates by central banks are at the root of basically every major asset bubble.
This was the case for this crisis, as the Fed's low interest rates created a massive bubble in real estate, but other factors such as lending regulations by the federal government added fuel to the fire, the derivatives that formed during that time, and of course the clearly unethical business nature of many involved in the real estate and banking industry. The Fed deserves the brunt of the blame IMO.
I think Greenspan has gone on record saying that he completely underestimated the effect that low interest rates would have on creating the bubble, but this is the problem with much of mainstream economic though. When we hit hard times like after the dot com boom, it says to respond by lowering interest rates which will help pump money back into investment, but in reality it pushes the problem elsewhere.
You probably wanted to say lack of regulation. I am sure this is not very popular opinion in libertarian community but we need to face reality. there was no regulation of real estate brokerage firms. the same problem over and over again.
I'm referring to the Community Reinvestment Act of 1977, which regulates who banks should lend to. This played a big role in the housing bubble. I'm not denying that their was plenty of shadiness going on at real estate brokerages, but they are not at the root of the problem.
I agree! It can be hard to pin on one side, But I believe it's more on the Lenders side. I think we need to be responsible for our actions. And we have so many opportunities to learn about things! It's not fair that people refuse to educate themselves, Then they expect things to work out for them.
Do you mean you side more with the lenders?
If houses weren't pumped so high that an entire generation of the worlds population can barely afford a basic human need - somewhere to live -then maybe it wouldn't be quite as messy.
Well its probably worse now in many areas than it was. After the housing prices crashed in 08-09 companies with cash on hand purchased massive amounts of real estate in major cities. That real estate is now essentially taken off the market because those companies have no intention of ever selling it.
Manipulation happens everywhere. We see it in all assets. First a market maker steps in and begins quietly accumulating. He/she now corners the market because he/she owns the majority of the supply. There's few people who can dictate the prices so he/she gets to sell at whatever price they want.
Its pretty awful, and to me the question isn't on who to blame. Throughout history, we've seen technological advancements and free market capitalism give consumers better and better prices on pretty much everything.
Whilst the price of houses can indefinitely go up, it should be in proportion to the average salary. Clearly this isn't the case.
What's more frightening, is when the wealth (re)distribution happens and the rich continuously get richer through essentially pumps and dumps on various asset classes and then the blame is continued to be put squarely on the poor.
I bought my new home in 2005 the height of the housing boom. Barely. The company that was building the house went through Countrywide. I actually had issues getting approved for the loan only because I insisted on a fixed rate. Seems like nobody was doing that during the time ;-) Well they finally gave in and I got qualified. I had no idea what was going on, I just felt that what they were trying to push didn't make a whole lot of sense. Although the house dropped to about half of what I paid I was never upside down and I still live in it. The house is gradually creeping up to break even.
I guess to answer the question I feel that ultimately the issue rests on the buyer. But hopefully people learned a lesson. Maybe not if they got bailed out. I enjoyed the article.
Ouch, pretty sure they were hit one of the worst when the bubble popped directly because of massive amounts of subprime loans. Im glad that you didnt get hosed and you were smart enough to request a fixed rate. I never understood why people go with floating rates for such a long term investment. I want to know EXACTLY how much ill be paying and whether or not I can pay it.
Seems to me they preyed upon many. If you had grown up living in a family that had a hard time making ends meet , which is a lot of us. It's not hard to see how people could and were led to believe that they could get into a home. The lenders created the language of banking,just as lawyers made up their own language. Why? So we have to pay them huge amounts to interpret and navigate said language. Bankers did the same to those people, I believe. Even if they can't pay ,the banks got their house and all the payments made up until they stopped paying. Then the banks could sell their house too!! Probably not as lucrative because of the bubble pop. But who created the bubble??? Sub prime car loans will be the next bubble to pop, you watch!
Yeah I think morally im completely opposed to what they did, in many cases, it was monstrous, but the part of me that believes in the free market believes that as a private company they should be able to take risk and fuck up their own company. HOWEVER, when you fuck up and socialize the loss because you threaten to tank the economy, thats when things start to change my mind about making such predatory actions illegal. Its either going to be sub prime car loans, or student loans that are going to pop next. 08 set people back years of saving, so now they cant retire and people entering the work force can't find jobs.
I tend to concur with your concluding thoughts. After watching "The Big Short" I wanted to blame the crisis solely on financial greed. Lenders thought they were to big to fail. That said, I also think a lot of people were financially lazy and got used to relying on creditors telling them what they could afford. So you can see how that combination created these circumstances. Hopefully we have learned our lessons.
The big short does a great job of exposing the greed of some of the mortgage brokers at the time. I watched a documentary and it was saying many of them were going out in the town in NYC buying 50k bottles of champagne in the VIP lounge like they were going to continue making that money forever. Another great movie on the crisis is Margin Call if youre interested!
I think that whole problem of subprime crisis is a bit more complicated than two sided coin but most important thing in this problem is education and system of education. Trying to find a person or institution who is guilty is always subject for debate but there is no doubt about importance of prevention. My opinion is that part of the education on the schools should be economy "for dummies"
The things like interest rate, lending, borrowing and saving is the biggest issue. I read an article about Financial Literacy of middle class and there was huge research based on survey where 93% of people were not able to pick cheapest mortgage offer out of three examples. This is not a mistake of brokerage firms or their clients. This is problem of the system.
Basic education on the schools is boring. I know that. but there is a plenty of options how to educate young people by playing a games Lets call it gamification of the education. For adults is even better if they have some basic knowledge.
There is plenty of movies which are perfect material for education. Some of them are nice example how to educate young people in our schools. Just try to imagine how they will react once they see that theory they have learned is worthy. Playing games and watching movies is not boring. They can imagine what they will do with situations as their famous actors. I think this can works.
just example
I completely agree, basic schooling has failed multiple generations of people on the value and importance of saving money.
I think this gives an edge for people who actually want to educate themselves on the topic, but there are definitely going to be future events caused by a lack of basic understanding of finance. The amount an average person has on a credit card in the US has spiked massively in the past 10 years, in part to 08 but the trend was always positive even if we adjust for inflation.
The blame belongs squarely at the feet of the Federal Reserve and the federal government. Thanks to the Department of Housing and Urban Development as well as policy initiatives begun under Clinton and carried over through Bush, home ownership was being pushed to lenders. Lending standards were relaxed as more money flowed into the system thanks to the Fed and the government, both of whom pushed lenders to sign mortgages to people who were not credit-worthy enough to afford a house.
Could lenders have said no? Certainly, but what bank in its right mind would want to say no to what essentially became free money? It was lent out at basement rates to banks, who then turned around and lent it out for profit even at remarkably low APRs. This distortion of the risk associated with lending to people who otherwise would have been unable to afford a house drove the bubble. Without the Federal Reserve and government policy, there likely would have never been a housing bubble, or, if there had been one, it would have been unremarkable and would not have infected virtually every sector of the economy.
I tend to aim in this general direction. In my country over the pond, and I guess its the same there, I always figure that if politicians 'give the people what they want', which has become a never ending feeling of prosperity, it furthers their reign and keeps joe public from looking too deeply into the other mischief they have their generally grubby hands in. Its more about retaining power while keeping the lesser informed people happy as pigs in shit (not wishing to be rude, just expression). And as the first comment from steemed, pointed out, when it all inevitably tumbles we can start laying the blame on the less informed people who were pulled into the pyramid at the bottom "larger theme that attempts to blame low income people for society's problems", while the orchestraters make out like bandits and others lose jobs. We have it in the UK, apparently now its all the 'poor ignorant fascists' who wanted to leave Europe (the language used is appalling because the public went against the desired outcome of the system). This is the same type of bs just one step removed. And so it goes on. Lenders and borrowers are simply part of the messy jigsaw of greed and power. Funny thing is, right now this whole thing is currently repeating itself.