Investment propertyWho"s To Blame For Mortgage Morass?
When a Fortune/CNNMoney.com writer recently opined about those responsible for the mortgage morass, the Feds and Wall Street were at the top of the list, but mortgage brokers and lenders weren"t far behind.
According to Peter Eavis, there"s plenty of blame to go around for subprime mortgage foreclosure-induced credit tightening and the resultant fallout that"s blanketing the housing market and spreading to the general economy.
In "Subprime: Let The Finger-Pointing Begin!", Eavis spreads the blame with a 1-to-5 finger-pointing scale, called the "Blame Factor," where 1 pointing finger is little blame and 5 pointing fingers indicate the highest level of blame.
Eavis isn"t your ordinary man-on-the-street-on-a-soapbox.
Relatively new to Fortune, Eavis is a TheStreet.com alum who won a Gerald Loeb Award for his Fannie Mae coverage back in 2005 and is noted for early coverage of subprime issues. He was also among the first to cover the Enron debacle.
The offenders according to Eavis?
The Federal Reserve gets 4.5 fingers because, said Eavis, it had the power to stop the risky business of subprime lending sooner, but actually encouraged the use of riskier loans as financially savvy.
Eavis specifically blames former Fed chair Alan Greenspan for keeping interest rates too low for too long. Low rates helped spawn the housing boom.
"Those rate decisions showed that Greenspan had chosen to use the housing market as his main instrument to prop up the economy after the 9/11 attacks. Using monetary policy to encourage a rise in home prices would be a highly unorthodox move for a central bank. But evidence suggests that Greenspan was overly keen to use housing for exactly that," Eavis writes.
Recounting how Greenspan encouraged the use of adjustable rate mortgages (ARMs), he writes, "Greenspan gave a speech that blessed the creation of new loan products, including subprime home loans."
Eavis gave Wall Street 4 pointing fingers for backing the money to make the loans. He called the effort a "remarkable mortgage machine Wall Street"s investment banks and hedge funds concocted."
The investments initially earned billions and, as such, became a monkey on Wall Street"s back until it was ripped off by soaring numbers of failing loans.
Mortgage lenders also earned 4 pointing fingers for making NINJA loans (loans made to those with no proof of income, no proof of a job or assets). The industry has paid for its loose-money ways in terms of lenders going belly up, branches getting shuttered, stock prices crashing and demand plummeting.
Mortgage brokers warrant 3.5 pointing fingers for enabling borrowers to get a fix when they couldn"t really afford it. Many of them continue to offer come-ons.
"And let"s face it, with their nonstop marketing on the radio and the Internet, they"re easy to scorn. They made millions, and as pure middlemen, they will feel relatively little in the way of consequences -- aside from a sharp drop off in business," Eavis writes.
To the rating agencies, who blessed risky mortgage funds with invincibility, Eavis points 3.5 fingers.
Calling rating agencies" work "financial alchemy," Eavis says the raters are too often influenced by the investment fund makers and were under experienced in the new subprime based funds.
"The shortcomings of the system became blindingly apparent in July, when Standard & Poor"s and Moody"s abruptly downgraded nearly $6 billion of subprime-mortgage-backed bonds. Many of the subprime mortgages backing the bonds were less than a year old. That means the rating agencies had little idea about the quality of those loans when the bonds were issued," Eavis wrote.
Those who purchased homes with risky loans and took on debt they couldn"t afford, the borrowers, earned 3 pointing fingers for getting hooked.
Ignoring common sense, borrowers allowed themselves to be overwhelmed by low-interest rate carrots, TV shows promising real estate zillions, Web sites revealing home value jumps, offers of overnight home ownership and other come-ons.
"Now many will pay dearly for their poor judgment -- losing their houses, having their credit ruined," Eavis writes.
Finally, appraisers, considered "bit players" in the game, get 2 pointing fingers for acting as "brokers" handmaidens … who too often buckled under pressure from lenders to overvalue houses."