I’ve been reading a lot about our nation’s foreclosure crisis and it’s an issue that has hit my area (NE Ohio) pretty hard. I am having a really hard time deciding who to blame. The list of suspects is long:

  1. Borrowers
  2. Real Estate Agents
  3. Brokers
  4. Lenders
  5. Banks
  6. Wall Street and Big Investors

I think that is a (roughly) accurate view of who relates to a mortgage.

Blame the borrowers

Being a person who owns a house and is fairly good with numbers, I find it easy to blame the “irresponsible borrowers.”

Buying a house is a huge deal and there is a correspondingly huge amount of paperwork involved. Some of that paperwork describes in painful detail a payment schedule. I realize that one of the problems here is that people received exotic loans with varying payment schedules, but I’m talking about people who couldn’t make the first payment. There are reports all the time about people falling behind from day one–not when their 5-year ARM shot up.

On the other hand, home buying is a complex and emotional process. This is why we have agents and lenders. These guys are supposed to help protect us from ourselves. But they don’t.

So let’s blame them.

Blame the agents

This is a tough one for me. We had a great experience with both homes we purchased and felt that our agents helped us through the process. At our first closing, it was our agent who uncovered a couple errors and ultimately netted us a couple hundred bucks back.

I can’t say for sure if either agent would have stopped us from getting in over our head, though, I’d like to hope so.

OK, so the agents are off the hook–let’s blame the brokers and lenders instead.

Blame the brokers and lenders

This is where I get really fired up and here’s why: these guys have virtually no incentive to be responsible. A broker’s job is to basically connect people who want money to people who have money–they facilitate and take commission from a transaction without risking any of their own money!

As I understand it, all a broker has to do is convince a bank to fund the loan. Since this is a free market, the broker can shop the loan package to multiple banks until someone bites. Over the last few years the standards of a “good loan” have erroded to the point where my dog is considering his own place–all driven by the insatiable demand for mortgages as investments.

NPR’s This American Life has an incredible story about this part of the crisis and I highly recommend it.

Who is funding these loans? Banks.

Blame the banks

Somehow in their 20-hour work weeks (closed national holidays, weekends, paydays, full moons and days that end in “y”), bankers managed to buy any and every loan. Despite no income, assets, or SSN, Pirate (my dog) was approved for a sweet crib in the hills.

This is the last line of defense when it comes to investment quality. Banks had no business buying horrible exotic loans but their thirst for mortgages clouded their judgement and the money was good.

From hereon, mortgages were bundled together and sold as packaged securities. This had the nice property that they were easy to invest in but one nasty caviat: so much detail was obscured in aggregation that risk was very difficult to gauge. But hey, they’re mortgages–those are like super safe investments, right?

This is where it stops with me. I don’t blame Wall Street or the big investors. They thought they were buying good stuff with AAA ratings.

So, Blame everyone but Wall Street

Borrowers need to be smarter. Education is key here. A simple, accurate monthly budget might have prevented a lot of this. Losing your home and destroying your credit is probably enough punishment so I’ll let them off the hook for time served (20% of the blame). As much as I think a bailout of any kind is unfair to the rest of us, something needs to be done–but that’s for another time.

Brokers and lenders take a hefty portion of the blame (30%) for selling people things they couldn’t afford. These guys are the first line of defense but since they’re part is over when the loan closes they have all too much motivation to look the other way, commit fraud, or just plain oversell us. As I see it, this level is also the biggest opportunity for fraud.

I place the remaining half of the blame with the banks. Just because everyone else is buying crummy loans doesn’t make it right. It sounds like I’m talking about a child and maybe I am. These are the guys with the calculators, spreadsheets, forecast models, degrees, etc.–They’re supposed to be the experts! I am really struggling to wrap my head around when bankers must have been thinking when they bought junk mortgages. Maybe the truck-loads of cash helped.

What Now?

That’s a toughy. I don’t think more paperwork is the answer–that’s part of the problem. I think the process of buying a house should be overhauled and simplified. There’s little reason for it to be so ridiculously complicated and the devil’s in the details with this one–if you can’t understand what a paper says, it could be screwing you big time.

Until then, I encourage buyers to run budgets with a close friend or higher a planner (and be realistic about the numbers) before looking at houses. Once you know what you can afford, don’t look at anything higher and stick to conventional fixed-rate loans.

With respect to holding the industry accountable, it looks like the market is taking care of that for us (and bringing everyone down with it, unfortunately). I have no sympathy for the banking and mortgage industry but have resolved myself to the fact that our government will probably continue to bail them out, too, until this blows over.