Who is to blame for the subprime mess?

Gerald Herbert

Former Federal Reserve Board Chairmen Alan Greenspan, left, and Paul Volcker, participate in the Treasury Conference on U.S. Capital Markets Competitiveness, Tuesday, March 13, 2007, at Georgetown University in Washington. (AP Photo/Gerald Herbert)

"You can't blame consumers for wanting to live the "American Dream." These companies knew exactly what they were doing and they knew they were taking advantage of the opportunity. I think these lenders were predators and should be held accountable 100%." -- Kim, Indiana

"There are two primary sectors to blame. First obviously are the lenders who get so smitten with the opportunity for growth in receivables, that they forget about the basics. It doesn’t matter how good the interest rate you’re getting is if you don’t get the money back to begin with. And it doesn’t matter how good a borrower’s ability to pay is today, if it’s unlikely that in a year or so when payments are bound to increase (not only from interest rate increases, but tax increases from increased property values, etc.), that the borrower’s income isn’t likely to increase at the same rate. Secondly are the mortgage brokers who are worried only about the commission they’ll get when the loan closes, and aren’t above giving directions to a borrower on what to put – or not put – on their loan applications, as well as suggesting ways to write a real estate contract so it appears to be something it’s not. Yes, I’m talking about loan fraud! People typically think of lenders when you talk about loan fraud, but in many cases, they can only base a decision on what they see, and sometimes, what they see is not what they’re getting." -- Mike K., NC

"Who is to blame? The idiots who took out loans that had payments that were more than the income they had coming in, that is just dumb. On top of that, they used the loans to buy things that were extremely overpriced. I love this kind of behavior because the smart people all knew this was coming and have positioned themselves to profit from this mess. Live, learn, and profit! To all those who are crying about losing their homes, next time seperate emotion from logic. Emotion is the quickest way to the poor house. Fools and their gold soon parted....HAHAHAHA." -- Ron G., Rancho Cucamonga, CA

"The people who borrowed the money and the companies that loaned it to them are the one responsible. The more this country looks to the government for direction the more distance we put between people and their accountability for their actions. If you have bad credit and a financial institution makes you a loan is there a surprise that when the economy slows down some portion of the loans go south? No. The financial institution has plenty of well educated people and knew the risks. As a borrower if you were not aware of the chance that you could loose your house then you didn't do your own due diligence. The real losers in this are the people that own the properties neighboring these foreclosures since their values have declined. Or maybe their values now really reflect what the homes are worth.

It is a very simple scenario to predict: People who do not have construction skills buy houses, outsource most or all of the work, and sell a house they bought for $200,000 for $300,000 after adding $25,000 of improvements. Now, can you really believe that the "Service" that they provided was worth the $75,000 profit they made in a few weeks? If providing construction supervision was so profitable then general contractors would be charging a whole lot more since that is all these house flippers really do. The fact that there are countless TV shows on "Flip this House" and people are buying real estate on speculation says that there is a housing bubble. If a financial institution is dumb enough to lend money to a high risk applicant in this type of market then they can't be surprised when the music stops and a few extra chairs are missing.

Let Darwinism work in the financial markets and the consumer market. Maybe people will be smarter when they realize they have to pay for their decisions and maybe the financial institutions that survive any subprime impact will actually be the ones that saw the risks and made the smarter decision by avoiding them. The lesson to investors is simple - looking for quick returns comes at a risk. Don't take the bet if you can't pay the price. This holds true for an individual investor or a financial institution. A fool and his money are soon parted. It's just a matter of time." -- Carl B., Olivet, MI

"The problem lies on the sub-prime lenders. Greed to make larger returns overtook common sense for the borrower to pay back loans at higher rates if there is a hiccup in the borrowers earnings." -- Phil

more responses...

“I really feel the mortgage broker business is to blame for this mess. I think better stricter guidelines should be implemented on becoming a mortgage broker.” -- Jason S., New Jersey

"The people who took out the questionable loans are to blame for their own problems. If you do not research how the loan could turn against you, or if you ignore the risks, it's your own fault if you get burned." -- Bill B., Oklahoma

“Deadbeat consumers who have no sense of restraint and reality.” -- Joe Z., New Jersey

"Actually I believe the fault is with the credit card companies. They have, for whatever reasons, been allowed to charge what used to be considered usury rates of up to 30%. Thus, if one gets a bit behind in their mortgage payment, the credit card companies raise their rate to their maximum. Now the poor consumer can't make payments on both their mortgage nor their credit cards. In our state we allowed these maximum rates to stimulate the credit card business but they have all been bought up by New York banks and we're stuck with maximum rates." -- George R., Illinois

“People panicking seem to be affecting the market in a negative way. Not sure why, since this time seems to be opportunity instead of doom and gloom. When people can take a deep breath and relax, then money will continue to flow back into the market. Also, it would be great if Greenspan would retire and enjoy life instead of talking about this and that related to the market. It scares people when he says things like he does." -- Mark D., Virginia

“The Federal Reserve created easy money by keeping rates so low for so long and the lenders offered terms that were too dangerous, such as no money down and bubble mortgages. The home buyers also share a great part in the fiasco because they misread their ability to pay off their debt and all too often were banking on an increase in their homes value to do refinancing or take equity out of their home.” -– Russ L., Florida

"Lenders, brokers, lo's putting people in loan with 2 year adjustable rate mortgages that have 3 year pre payment penalties should be against the law. I don't know how these people sleep at night doing loans like this. It is a screw you loan as is a pick a pay loan, that is setting people up for failure like making minimum payments on credit cards on a broader scale." -- Derrick B., Tulsa, OK

"I think the lenders are at fault for the mess in the sub-prime market. They should have screened the loans better. Does it make sense to give a person a loan if they really can't afford it only to foreclose later? The result is the borrower having worse credit and less money." -- Nick G., Florida

"There's plenty of blame to go around. First people are living outside their means. Whether it's home loans they can't afford or running up credit cards buying stuff they really don't need. I know people with 25K in CC debt and don't have $25 in saving, that's crazy. Second, the lenders own this problem too - "Hey, let's loan someone 3/4 of a million and not even verify they have any income." How could that possibly have gone wrong? I think many lenders thought the market was always going to go up so even if they ended up own the property they'd be able to turn a profit on the sale. Great thinking ... until the market drops. People need to live within their means. Just because your co-worker has 5500 sf. home in the burbs, it doesn't mean you have to have one too. And lenders need to understand they have a responsibility to your share holders not to engage in such questionable loans." -- Steve W., Astoria, OR

"The democratic party and republican party both are representing suburbia and not the nation. Home investment is encouraged and saving is discouraged. The currency and the nation are in danger." -- T. Parker, MD

"I am an investor with rental properties, I took out two loans in the Prime Market in the last two years, and documentation review was so lax, it is a small wonder the Sub Prime Market is in real trouble. Whether it is dot.com, tulips, or real estate, feeding frenzies and greed always go to the extremes before the blow outs. It wasn't a real estate bubble, but an interest rate bubble that may take years to unwind. I not sure you even needed a pulse to get a Sub Prime loan. Greed is to blame from the investors who buys the wrapped loans to the serial flippers, who wants one more fat housing profit, or the person who buys way more house than is prudent. Of course, CNBC, the financial drama queen of TV, has to blow the "Sub Prime" problem out of context. Now all the politicians are falling in line for TV face time. Is this a great country or what." -- G. Andrew, Chico, CA

"A misunderstanding and miscalculation of risks led to aggressive marketing by mortgage lenders of short-term mortgage products which are highly dependent upon home price appreciation and a borrower’s ability to refinance out of the mortgage before certain triggers in the terms of the mortgage, including the expiration of temporary fixed interest rates, result in substantial payment increases. This problem is not limited to subprime loans. Most subprime mortgages have a 2 year fixed interest rate period. Most prime adjustable rate mortgages have a minimum of a 3 year fixed interest rate or “minimum payment” period. This means that we should expect problems in the subprime sector first, followed by problems in the prime sector as prime adjustable rate mortgages that were originated within the last several years start to reset. This is especially true with payment option arms - a type of prime mortgage which has a negative amortization feature which takes away home equity and lessens the borrower’s ability to refinance in a housing downturn at the same time the payment increases substantially. Additionally, many of the same borrowers who have prime ARM’s have home equity loans which add to risk. Lenders are partly to blame for not explaining or misrepresenting mortgage risks to borrowers, including extremely optimistic estimates by future home price appreciation, and borrowers are to blame for not understanding their mortgage(s), and taking on too much risk. Mortgage investors (CDO and MBS portfolio managers) should have been able to analyze and recognize these risks." -- Barry N., Cranberry, PA

more responses...

"The lenders making the risky loans. Risk goes both ways, so they should take the hit. The government has set a bad example, borrowing and spending, beyond their means, and the old Fed fueled it with a ridiculous amount of liquidity. But I don't think the new Fed should try to bail them out, too much cheap money is what started the problem. The new Fed has so far set a tone of independence from the white house, unlike the prior group, and they should continue to maintain it." -- Nick A.

"The blame ultimately falls on the shoulders of those who take loans and live beyond their means! But that is what keeps the wheels of capitalism going, the constant pounding from the media that you need more and more stuff even if you can't afford it, just charge it and pay for it later, unfortunately you have too many people doing this and at some point and time you have to pay the piper. America might want to be careful because the Piper might be CHINA!" -- Dianne R.

"The companies in subprime market ... and this has been in the making for years. Due to my own experience switching careers from selling autos to homes was informed people with a 560 FICO score were qualified to purchase homes at 100%, but with the same score no one would finance them for autos ... I said this makes no sense." -- John C., San Antonio, TX

"President Bush. I'm pretty sure all the subprime people were heavy contributors to the Republican party." -- Ivan G. S., Miami Lakes, FL

"It's the federal government's fault, especially the liberals in congress who don't want business to probe into a persons affairs, i.e. citizenship, gender, race, income, income sources, etc. Then after the train runs off the track, they are quick to blame the lenders in that they didn't ask the borrower's enough probing questions. I am tired of government regulations, business should be allowed to protect their interests. Both political parties need to focus on the best interests of our country and make their party affiliation secondary to everything." -- Jim

"Lenders themselves who lowered or waived most typical (lending) requirements." -- Karen W., PA

"The speculators who purchased multiple condos and other dwellings on a shoestring." -- Paul M.

"Its always been easy to point fingers after a mess: The government should have mortgage brokers licensed and regulated. If one goes to buy $10,000 worth of stock, they may do so through a "licensed" stock broker; however, when going to buy a house, the largest investment of a person's life, they get financing through "Joe" the mortgage broker down the street. Last year he worked like Stewart, driving a cab, now he is raking in the dough doing mortgages. More than likely he has "experience" (maybe 3-6 months) advising a new homebuyer. He doesn't care, he just wants to get the loan done so he can get paid. Reminds me of the 2000 tech, we get greedy, overextend then put the blame, "please feds rescue me". This is a lesson that needs to be learned. Don't treat your house like a ATM machine. And government now regulating those loans, too late, the damage is done." -- George, AZ

"Greenspan set out to BUST the housing market while he was still in charge. Now he is whining about a spillover as a private citizen. His monetary practices should be reviewed by an Independent counsel." -- Howard F. NY

"Greedy, unethical companies and consumers not doing their homework and trying to buy something they can not afford. This taking out a 2nd mortgage to cover the down payment is ripe for failure." -- Bob, Estes Park, CO