For months the Mortgage Guy has been fighting the flawed perception that those most culpable for the mortgage meltdown are the buyers, realtors and mortgage originators. Conventional wisdom would have you believe they are most and directly responsible for the real estate meltdown and the mortgage crisis.
My contention is that the home buyers, real estate agents and mortgage originators are being wrongly blamed for the mortgage meltdown. Sure they played a part, but I believe their respective responsibilities for the debacle is minimal and leaning toward innocence in nature and intent.
All political and regulatory emphasis to date, has been put on either adding to already burdensome lending regulations or bailing out the “greedy” home buyer. That is until the Securities and Exchange Commission set their sights on the mortgage securitization process. This is where the biggest, most serious and harmful crimes were committed.
A look at this recent Yahoo News article will give you an idea as to what the SEC is concerned with.
The Securities and Exchange Commission is investigating how banks, credit rating firms and lenders valued and disclosed complex mortgage-backed securities that ultimately led to the subprime crisis, a top agency enforcer said on Saturday.
The article points out that while the SEC didn’t name the companies involved, Merrill Lynch and Morgan Stanley have disclosed regulatory investigations pertaining to their role in the credit crisis. In all, there are over thirty firms being looked at. It goes on to say…
Banks, due diligence firms and credit rating agencies are being examined for their role in the securitization process, or how mortgages were sold, repackaged and bundled into special financial products.
The SEC is looking at the valuations and accounting treatments of mortgage-backed securities. It is looking at whether the securities were valued correctly in the first place, what was the level of risk and if that was adequately disclosed to shareholders.
In my opinion, the investment banks, with help from others, committed the fraud of labeling credit standard deficient loans as AAA investment grade paper. By doing so, they were able to feed a huge hunger for safe but uncharacteristically high yielding investments. Feeding this appetite for high yet safe yield, allowed for the spread of this toxic paper all over the world.
The investment banks could not pull off the crime of the century without having ample assistance. This is where the ratings agencies and due diligence firms/departments come into play.
It is up to due diligence entities to properly assess the risk and suitability of investments. Apparently, based on the total destruction of our credit markets, these due diligence “experts” couldn’t see that by mixing a pot of AAA mortgages with a pot of DDD mortgages one cannot expect an investment pool deserving a AAA rating as the end result. This is so even if you take into consideration that they bought “insurance” on the portfolio.
The final gate keeper responsible for safeguarding the investment public from misdeeds such as these, are the credit rating agencies. These so called “independent” firms really have the final say as to the grade of any debt security. Yet they also couldn’t see that an investment portfolio with a major exposure to credit standard deficient mortgages should not be rated AAA in safety.
A reasonable person would wonder why the ratings agencies would implicate themselves in what turns out to be the total destruction of our debt markets. The answer is the same for all involved. Money.
At S&P, for instance, no longer will they hand out triple-A’s to issuers who pay them boatloads of fees. They now will employ an ombudsman to listen to complaints about the agencies handing out triple-A’s to issuers who pay them boatloads of fees.
What if General Motors built cars that didn’t run, or your local dairy produced sour milk? What if your bank said it didn’t deposit your paycheck because it lost it, or the electric company just quit supplying your neighborhood?
Then, in response to it all, those companies said: good news, we’re hiring an ombudsman. The ratings agencies in the same fashion have failed on their intrinsic purpose: to judge the likelihood that a debt will default. As of Tuesday they’re about 0 for a few billion.
The quote is from an excellent MarketWatch article that gives insight into the role the ratings agencies played in the destruction of our credit markets. I owe a huge hat tip to The Common Sense Forecaster for bringing my attention to it.
It’s important to realize that events leading to the mortgage meltdown occurred on a “top down” basis. Buyers cannot buy from realtors unless mortgage originators have the loan programs to fit the buyer’s profile. The mortgage originators cannot offer loan programs unless lenders are providing them. The lenders will not provide loan programs unless the securitizers can turn the mortgages into marketable securities and the ratings agencies have the final say as to the grade (the likelihood of default) of those securities.
Proof for this observation is the current state of the mortgage industry. Despite the current demand, no longer are 100% financing for credit damaged borrowers and stated income and asset programs available. This is because lenders cannot securitize these types of loans. They cannot securitize these loans because it has become painfully apparent to investors that these once called AAA investments are nothing of the sort.
Also evidenced by the current state of the mortgage industry, is that without the securitization of mortgages, no one lends and thus, no one buys real estate or borrows money against their house. This makes it clear that it is the securitization engine that drives the entire mortgage process and in turn the real estate markets.
The demand still exists for 100% financing, no income, no asset loans and subprime/alt A loans in general. Being that these programs are no longer available, makes clear that the mortgage business is not driven from the bottom up. The demand is still there, yet it goes unanswered because the securitizers cannot sell the mortgage backed securities. The business is indeed driven by top down forces.
Realizing that the mortgage industry runs on securitization, it’s plain to see who the real criminals are in the mortgage crisis. It is clearly the securitizers, due diligence firms and ratings agencies. They are the major force behind the mortgage industry and it’s destruction.
Without the securitizers lying about the credit quality of the subprime mortgages being securitized, and the winks and the nods from the due diligence firms and ratings agencies, the securitizers could have never sold anywhere near the amount of toxic debt that has been polluting investment portfolios and economies around the world.
The fraud committed by these criminals created the immense capital that led buyers and originators to use the unsuitable mortgage products that have led us into this world wide crisis. They enabled the lenders, originators, realtors and buyers in committing their misdeeds which have led to the total seizing of our credit markets. This in turn has thrust our economy into recession and potentially much worse.
Now it should be clear to all, the buyer, realtor and originators were simply responding to demand that was met by capital that was fraudulently raised. All the buyers wanted was a piece of the “American Dream”. Realtors sought to help them get it and the originators were empowered to provide the financing by the capital raised through fraudulent means.
These subprime/alt A, toxic loan programs simply appeared on our rate sheets. The guidelines specifically allowed for damaged credit, no down payments, no proof of income, assets and in some cases no proof of having a job. There was no fraud involved because the product guidelines allowed for these aspects specifically.
Originators who realized these types of loans were time bombs waiting to explode, could not refuse to sell them. If they did, the consumer would just go to another originator offering these programs. Believe me, there were many originators who saw the writing on the wall two to three years ago. Yet we were powerless to do anything about it. It wasn’t our money being lent, thus we had no say and market forces worked against dissent.
It’s time to end the mis-perception that it was the greed of buyers, realtors and originators that led us into the subprime/credit crisis. Yes to a degree this element played a part in the dilemma but this is not the real cause of the meltdown. It was the titanic greed of the securitizers and their “assistants” that fraudulently created the capital and market forces that have led us to the historic break down of our credit markets and economy.
The first step in restoring confidence in the debt markets shouldn’t be bailouts for the investment banks and insurers. Nor should it be bailing out homeowners through rendering legal contracts as useless. The healing will begin when the real criminals are outed and the perp walks proceed down Wall Street.
Then the world will know our markets are governed by the rule of law, one set of laws for all and no one above the law, as opposed to political cronyism. The perception of political and regulatory cronyism will undoubtedly taint our securities markets forever. This will further weaken the United States’ ability to be a world class economic player.
Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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