NationStates Jolt Archive

Is there clearly one side to blame in this mess?

It seems to be a combo of both predatory lending and greed.

My question is this:

Banks sell the papers to other countries. Does that not shift losses? If that is the case, doesn't the sub-prime debacle fall mainly on the banking industry?

Is there clearly one side to blame in this mess?

It seems to be a combo of both predatory lending and greed.

My question is this:

Banks sell the papers to other countries. Does that not shift losses? If that is the case, doesn't the sub-prime debacle fall mainly on the banking industry?

I would assume its the fault of both borrower and lender. I mean, getting a huge loan is pretty dumb if you can't pay it back, at the same time, trying to give people loans they can't pay seems pretty stupid as well.

I understand that the rates on the loans changed, but if you didn't realize your rates could change you either need to head back to school or at least try to read what you sign. So, the individuals who offered the loans, set the loan policy and accepted the loans are all at fault.

Loads of people are to blame. Homeowners who overstated their income to get houses they can't afford. Real estate speculators who drove the house price bubble in the first place. The mortgage lenders who sold the mortgages on the first place. The people who created the CDO's, exposing dozens of banks around the world to the crisis and S&P's and Moody's for giving the CDO's AAA ratings.

Banks sell the papers to other countries. Does that not shift losses? If that is the case, doesn't the sub-prime debacle fall mainly on the banking industry?

It sure does. The problem is that no one knows which banks will take the losses hardest so no one is lending short term, and many banks who haven't even been exposed directly to subprime mortgages are running into problems because they can't get the short term loans they need to operate.

Loads of people are to blame. Homeowners who overstated their income to get houses they can't afford.

How could they do that? I had to bring in proof via paystubs and stock sheets.


Real estate speculators who drove the house price bubble in the first place. The mortgage lenders who sold the mortgages on the first place. The people who created the CDO's, exposing dozens of banks around the world to the crisis and S&P's and Moody's for giving the CDO's AAA ratings.

The lenders were complicit as well.

When I was hunting for mortgages; there was too much emphasis on ARMs in their pitches.

For once I listened to my gut instincts and took a fixed. But the bastards still made me take a variable line of credit. I had zero debt and 10% down.

When a year went by I refinanced to get rid of the variable and they still tried to sell the arm really hard.

Ended up with a higher interest but that damned variable would have made things really bad for us if we still had it now.

Both parties (lenders and borrowers) are at fault, although neither through malicious intent. Likely, lenders were wearing rose-colored glasses when looking at economic prospects, and the abilities of the lenders to pay it back, and the borrowers for being so foolish as to take out the loans without undertaking proper research and looking into it thoroughly.

I would say that it's more a case of lenders being at fault than borrowers, but that doesn't absolve borrowers, at least not the ones who should know better. If someone who grew up poor thinks that a sub-prime mortgage will get them into the home they feel they need, then they will buy that home and qualify for that sub-prime mortgage based on what's probably bad education (or a complete lack thereof.) Therefore, it's a predatory lender playing to a borrower's lack of education. More the fault of the lender, I would say.

However, there are people who really "should" know better, i.e. the educated who are buying, say, a starter house. I'll take myself as an example - this past summer, my wife and I bought our first home, a three-bedroom condo. If we were to try for one of those ludicrous sub-prime mortgages or get an ARM (adjustable rate mortgage, for those who would confuse that term with the appendage,) it would be our fault for being idiots just as much as it would be the lender's fault for being predatory jerks. Naturally, we knew better and went with a cut-and-dry fixed-rate mortgage, and the only thing we can really gripe about is paying a higher interest rate.

Simply put, whose fault it is depends on how much the borrower knows and "should" know.

Leprechauns.

You definately can't blame the borrower, if the borrower's credit is so bad and he needs the money where else is he going to get the money from?

However, there are people who really "should" know better, i.e. the educated who are buying, say, a starter house. I'll take myself as an example - this past summer, my wife and I bought our first home, a three-bedroom condo. If we were to try for one of those ludicrous sub-prime mortgages or get an ARM (adjustable rate mortgage, for those who would confuse that term with the appendage,) it would be our fault for being idiots just as much as it would be the lender's fault for being predatory jerks. Naturally, we knew better and went with a cut-and-dry fixed-rate mortgage, and the only thing we can really gripe about is paying a higher interest rate.


Often the borrower isn't able to get a fixed rate mortgage though.

I agree with LAC.

The lenders are the experts and they knew what they were doing. They knew not all of the "qualified" borrowers were really qualified. They understand the complexities of mortages and the market far better than even the most informed layman.

Sure, borrowers *ought* to have known better, but the truth is that this stuff is insanely complex. Expecting a borrower, especially a first-time borrower, is like expecting a defendant to be able to go to court without a lawyer (without having been a law student).

There's plenty of blame to go around, so everybody gets a piece, but I'd say the largest single factor is greed. Mortgage companies and banks kept giving out ever riskier mortages so they could rake in the cash, and now they've gambled and lost. What galls me is the way some of them are playing the vict im and expect Uncle Sam to come in and bail them out--so they can go right back to the same business practices that got them to this point in the first place.

I don't know what the solution is, but I think the goal needs to:

-Keep the banks from collapsing. This would ruin the economy and while it may be poetic justice, it's too high a price to pay for the rest of us.

-lower the costs of real estate. This is especially true of areas around cities where home prices are vastly inflated.

A comment on the latter: There are a couple of different ways to appraise the value of a home. One way is to compute the cost of replacement. In other words, what would it cost to build an identical house? Another is the cost of similar homes in the local market. What has a similar home in the neighborhood sold for recently?

In some areas those two methods would diverge wildly, because a large part of the cost of houses has to do with location. A $450,000 house near Washington DC sells for only about $225,000 in a neighborhood 75 miles away. This is an artificual increase in value. For a builder, it represents a much larger profit margin. For a bank, it means a mortgage whose interest rate and other terms are based on a value that can change by a HUGE amound due to market fluctuations. That $225k house isn't going to ch ange much in value, but the 450k one can lose a LOT of value in a crunch like this.

Which is exactly what's happening, and why the builders get a share of blame, too.

Often the borrower isn't able to get a fixed rate mortgage though.

Then they don't need to be buying a home, or they need to get some help in doing so.

You definately can't blame the borrower, if the borrower's credit is so bad and he needs the money where else is he going to get the money from?

There are other options besides buying a home in a case like that. It's far better to just live in an apartment and use the time to improve your credit score as well as squirrel away money for the house. If you're not making enough money to afford rent AND save money, then you weren't making enough to buy that house and keep up with mortgage, utilities, maintanence and potential interest hikes.

It's amazing how much difference a year can make. My credit was totally crushed after a period of unemplyoment. I couldn't borrow a quarter. My wife and I adjusted our lifestyle and once I was working again I focused on negotiating with my debtors, making settlements and paying them on-time. I got my other regularly scheduled payments caught up and now, a year later, I get 5-12 offers for credit cards in the mail each week.

I do want a credit card I can use to improve my credit through responsible use, but I'm holding out for offers with better terms. I've noticed that they've been getting better over time. In a year, maybe two, depending on how much progress we make as well as market conditions, we may try for a house. We want to do it when we're truly ready.

How could they do that? I had to bring in proof via paystubs and stock sheets.

The incidents where people have lied about their income are often due to forgery of whatever prrof of income they were required to bring. I expect that's not easy, so I suspect that the mortgage lenders themselves weren't looking too closely.

The stupidity of it all is that the people who do this sort of thing don't seem to consider the idea that there's a very good reason why the amount you can borrow is tied to your income.

The lenders were complicit as well.

I included them on my list.

There's blame all around. The people who obtained subprime mortgages and later defaulted are to blame for their financial ignorance and poor financial decisionmaking, the banks are to blame for allowing the sector to expand out of control and creating an undue amount of leverage within their company's assets, and Alan Greenspan is to blame for allowing this bubble to inflate as much as it did without taking action.

In no particular order:

1) Borrowers
They shouldn't have thought that rising house prices and low interests rates were sustainable forever. They should have gotten out the trusty old Excel sheet and done some stress testing to see how well they would be able to cope in a worst case scenario.

2) Lenders
I don't think they did anything particularly fraudulent. They sold their products with special offers, just like anyone else does.
I think they made their mistakes in thinking the time of savings deposits was over. They got the money they lent from the financial markets by taking on debt and especially by selling off the mortgages, repackaged to "eliminate" the risk and earn a nice little profit. They didn't do the stress testing either - that's why Northern Rock in the UK died.

3) Central Banks
Greenspan avoided a potentially bad recession by cutting interest rates a lot, and then decided that dealing with the consequences wasn't on his agenda. That's bullshit, and he must have known it. If anything, that might teach people that central bankers aren't magicians either, and that relying on them to save you when you get into trouble is not a good strategy.
But then, the Bank of England refused to bail out banks that suddenly couldn't get any cash from each other, and that wasn't a good option either - again pointing at Northern Rock.

4) Investment Banks and Hedge Funds
The trade in securitised mortgages is not that great a business to be in, because it's very risky. People relied on the belief that if anything ever went wrong, it would only be subprime-based securities that get into trouble, not the "normal" ones. That didn't work out either.
In fact, the whole idea of buying really long-term investments by issuing short-term debt seems a little weird to me, but maybe I just lack the training to understand it properly.

5) Regulators
I was under the impression that we have regulations and supervision in order to prevent bubbles like this from appearing and wreaking havoc. So they failed on a monumental scale. Many of the regulations and the supervisory setup are so old that they've been overtaken by financial innovations long ago. The Basel rules for banking encouraged banks to create these off-book "conduits" where they put all their money but away from their standard income statements. So no one could ever be quite sure just how big the risk was, because it became so hard to track down exactly where these securities were.

6) Rating Agencies
I don't know what the hell sort of system they use, but the finance industry depends on them giving an accurate idea about how risky an investment is. Their methods failed, because even though their overall risk of default is minimised because one security is made up of many, many loans which aren't all gonna default at once, the liquidity risk (ie the risk that no one wants to buy the thing and you end up sitting on a pile of securities if all you want is cash) was not assessed, and that was what got so many people into this mess. I don't know whether they just didn't know better, or whether it is because their clients are precisely the people who create these securities in the first place, but it needs to be fixed.

7) Banks
And finally, the banks did a crappy job themselves. Many failed to prepare themselves properly, their stress testing was often too weak. Some didn't secure emergency lines of credit and ended up in deep trouble almost immediately. Then there were the aforementioned conduits and that led to lending to another bank becoming an incalculable risk (because you couldn't actually tell whether that bank was in trouble or not).

All in all, if this taught us anything then that for all the modern portfolio theory, it's not possible for everyone to be hedged against risk. If the market goes down, someone must be losing. People forget that and think they're all safe.

There's blame all around. The people who obtained subprime mortgages and later defaulted are to blame for their financial ignorance and poor financial decisionmaking, the banks are to blame for allowing the sector to expand out of control and creating an undue amount of leverage within their company's assets, and Alan Greenspan is to blame for allowing this bubble to inflate as much as it did without taking action.

Yes, what Vetalia said.

I would assume its the fault of both borrower and lender. I mean, getting a huge loan is pretty dumb if you can't pay it back, at the same time, trying to give people loans they can't pay seems pretty stupid as well.

I understand that the rates on the loans changed, but if you didn't realize your rates could change you either need to head back to school or at least try to read what you sign. So, the individuals who offered the loans, set the loan policy and accepted the loans are all at fault.

When people who don't know about a subject consult experts in that subject, it is not the fault of the consulter when the consultant sells them a pipe dream.

When you take out a loan you have to go through a loan officer. That person's job is to see to it that loans get given to people who can pay them back, or that the money made from those who do pay them back covers the losses of the bad debts.

If you go to an oncologist who tells you that the zit on your ass is a tumor, it is not your fault that you ended up getting your legs amputated needlessly.

If you go to a loan officer that tells you that with a variable rate mortgage you can accept the teaser rate now then refinance when the interest rate hike kicks in, it is not your fault that you can't refinance and end up in foreclosure.

Both parties (lenders and borrowers) are at fault, although neither through malicious intent. Likely, lenders were wearing rose-colored glasses when looking at economic prospects, and the abilities of the lenders to pay it back, and the borrowers for being so foolish as to take out the loans without undertaking proper research and looking into it thoroughly.

Again, when you are trained to operate in a field you own more of the responsibility when things in that field go sour.

It doesn't take a rocket scientist to see that when people don't have much money they are more likely to default on loans when they much pay back more each month rather than less.

BTW, what legal distinction is there between a loanshark and a sub-prime market lender?

There are other options besides buying a home in a case like that. It's far better to just live in an apartment and use the time to improve your credit score as well as squirrel away money for the house. If you're not making enough money to afford rent AND save money, then you weren't making enough to buy that house and keep up with mortgage, utilities, maintanence and potential interest hikes.


On the other hand, my wife and I have great credit. Both of us have credit scores that are well above 700. However, we can't buy a house because we can't afford to both pay rent and save up to put a down payment on a house.

If we could simply take out a loan with a reasonable credit rate we would be more able to meet our monthly expenses because in the boroughs and suburbs of NYC a mortgage costs less per month than rent for a 3 bedroom apartment.