I got this email today (a good one) from a reader wanting to know who we should hold responsible for the mortgage "crisis."

Q: David: Can we hold our political leaders responsible for the financial crisis comprising misrepresented mortgage-based financial vehicles, like CDOs, derivatives, and other mortgage portfolio "packages" or is this so-called crisis just the by-product of a "natural" inclination of the mortgage market to correct itself in accord with principles of supply and demand? In other words, is there a specific group of humans culpable for this crisis?

A: Good question. Here's my answer.

Your Senator or Representative had nothing to do any of the instruments you describe. Nor did Bush. I know Dick Cheney and Karl Rove are easy targets but they didn't have anything to do with it either. Heck, my San Diego Padres are in last place this year but just being in office doesn't make one responsible because it happened "on your watch." The Padres simply have no power in their lineup.

Wall Street did it. But it had to have a strong supporting cast. And mortgage companies are not intentionally correcting the mortgage market, what is happening is that the mortgage market itself is correcting. How?

There are no longer any buyers of alternative and sub prime loans, and lenders that made them are out of business. That's pretty much the harshest punishment a business can have. Go ahead, try and find a sub prime loan. You can't. Are those lenders culpable? Sure they are, but so are the investment firms that cleverly hid sub prime MBSs in CDOs, so are the bond raters, so are the loan officers, and also, let's not forget the consumers who knowingly lied on their loan applications just to get approved. Bush said Wall Street "got drunk" and I think everyone can understand that.

Remember, home values were skyrocketing, home ownership hit record levels and interest rates were low...very, very tempting. The loan officer could say, "Aw, don't worry about it! If you get into trouble you can always sell or refinance down the road!" No you can't when values fall. But home values hadn't fallen for years, so if history was any indication, then the buyer was likely to be home free. (no pun intended) Home buyers became speculators and all this happened in a relatively short period of time. The market corrects itself, with or without the government, and that's what we're seeing today.

Lenders are "sobering up" and doing odd (tongue-in-cheek) things like making sure you have a job and can afford the loan. I know that sounds harsh. So yeah, there are a specific group of culpable humans and they're wearing different hats. But they all had the same traits...fear and greed.

That's my opinion and I'm stickin' to it.

Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.


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