Secondary Market, Primary Target

I’m interested in getting some opinions on a story I’m reporting today because I’m not sure I agree with any of it.

As the subprime crisis continues to unfold, and tightening lending standards bring the already sluggish spring market to a crawl, the blame game is heating up on Capitol Hill. Some lawmakers want to hold the big banks accountable. Bear Stearns , UBS , Lehman Bros. , Merrill Lynch , they buy the loans, pool and securitize them. It is estimated that mortgage backed securities issued in 2007 will top 2 trillion dollars, not all of them consisting of subprimes of course.

Consumer advocacy groups claim it’s the big banks that encouraged the lax lending at the broker level, fuelled the loan frenzy with cash and then pimped those loans off to investors like pension funds and hedge funds. So the big banks should be held accountable.

“The holders of these loans have an obligation – an obligation to help us find solutions now – the banks and investors that are responsible for financing the explosion of these bad loans over the past few years are just as responsible in finding a solution,” says Sen. Sherrod Brown, (D-OH).

But others disagree, namely a certain senator from a certain state where most of those banks happen to live.

“The people who are really at the cause of all of this are the mortgage broker and the mortgage companies that issues the immediate loan. It's very hard when you get way up into the secondary mortgage market, when they don't know who the people are, to demand that kind of accountability,” retorts Sen. Chuck Schumer, (D-NY).

I have to say I’m on the fence. No wait, I’m nowhere near the fence; I think they’re all to blame. The housing boom and steep price appreciation offered easy big bucks. Just the sheer number of new mortgage brokers who jumped into the game should have been a clue to all these hind-sighters who claim they were clueless to the danger. The big banks saw an opportunity and they jumped in too, and why not, that’s what they’re there to do. Who pushed the borrower? Who pushed the loan? Who loosened the standards? They all did, and now, big surprise, they’re all left holding the bag.

And as usual, you know who wins now…the next to jump in the game: the lawyers.

Who to blame? The Maestro Himself - Greenspan
Here is someone to throw the blame at. How about the maestro himself, Sir Alan Greenspan. If Greenspan had let us go through a mild recession after the dot-com debacle, we may not be in the situation we are in now with housing. Greenspan panicked and tried to control the damage and a potential recession after the tech meltdown by taking rates down to 1%. That is what started the wild orgy in housing. When money is available for free it behooves everyone to get in the speculation game. When you combine money available at 1% with the yen carry trade at zero percent you get a mountain of liquidity that has to go somewhere. This time it went into housing and in hindsight we can now see the effects. Too much money chasing too little opportunity will always equal higher costs. That is the housing mess in a nutshell. - Ray E.

Caused by Greed
As always it's buyer beware. From the capital poor home buyer up to and including the big banks and funds. I believe Gordon Gekko was right- - it was all caused by greed and all parties involved should now pay the price. Heaven help us if the government steps in to help, it will only lengthen the pain and recovery period. - Al H.

Fault the Big Guys?
I am not sure that I agree that is the fault of the broker. Once you get to a broker level, they are usually at least three down on the totem pole, selling first to a wholesale mortgage company who then sells the loan to either an end investor such as Bear Stearns or if they are small to an intermediary investor such as American Home Mortgage who then sells to Bear Sterns or some other company who then securitizes it and sells it on the street. I am currently a secondary marketing manager for a small wholesale mortgage company. It is my job to sift through investor guidelines and offer products that are needed for our market area. You can offer only what you feel comfortable with, but the sad truth is, if it's out there and you don't allow it, the broker, LO, or end borrower will just go down the street and get it. So, yeah I think it is the fault of the big guys. If it was such crappy stuff, why put it out there and then offer such high premiums for it? - Tricia H.

Questions? Comments?