Who is to blame for the Great Bust?

Some guy named Lee Farkas, chairman of a Florida mortgage company, was found guilty of mortgage scam and is jail. However, he doesn’t look to me to be a cause, but just a classic numbers bender who was enabled by a situation created by others. Who are those others?

There is a gentleman even older than me whom I share coffee with fairly often. He is originally from Canada and is in real estate here. He says that back in the 60s and 70s in Canada you could not get 30 year mortgages. You got like a five year one and then had to renegotiate a new one. Back in about 1967 or 68 the mortgage rates were like 5% or so. Interest rates then began a long climb of about a percent a year and peaking at about 21% in 1981. There were Canadians who qualified at 5% or 6% and did fine. However, at some point in one of the five years cycles they had to re-negotiate at 12% or 17% or 21%. They went bankrupt and lost their house. For any whippersnappers here, that time period was of generally rising inflation, oil crises and stagflation. It was not mortgage or finance specific, it was just the tenor of the times. Anyway, seeing what happened with rising interest rates (not pretty) was part of the experience that was his makeup.

He says that when he saw the variable rate mortgages first come along about 2000 or after, he knew it was going to lead to a train wreck. The initial rate was too low for financial institutions to make money. They HAD to raise the interest rate over time to make money. It was built into the program. As he says, there were a lot of low wage people who could afford a mortgage at 3.5%, but cannot at 6%. Yet the program required the mortgage to go up for financial institutions to make money.

So ultimately the blame has to rest with the folks who came up with those products. Mortgage brokers could honestly get people into homes because they qualified at the initial rates of those mortgage products. That pumped up the home market. Appraisers could honestly appraise homes to fit in a rapidly changing market with prices going up. Builders could honestly build homes for all the people who (now) qualified. And so on. There was the usual gaming going on by people who cannot act honestly even if it were better for them, but the point is that you could be an honest person and fit nicely into your little part of the grand show.

Yet the whole thing was built on pumped up air – the requirement of the financial institutions to raise the rates significantly over time. That was not stated in the mortgages and was the unpublicized Achilles heel of the whole thing.

So ultimately the cause rests with the fancy folks who came up with the mortgage plans that (temporarily) got gardeners and fast food workers into homes and adventurous souls into buying two or three or more homes to flip. They devised the products that absolutely required mortgages rates to go up to a point where those people could no longer afford the mortgage, just like what happened in Canada in the 70s (but for a different reason).

They are responsible for the seed that pumped everything up to the point that it had to fall and fall hard. Here in AZ there are lots of homes for sale now that are 60% below their last sale price. That is below the price that builders can even begin to think about building the equivalent home, so they are dead in the water. With construction, which used to be a big economic driver, dead in the water, the state economy is bouncing along what we hope is a bottom and you are probably looking at a couple of years more before it has really healed.

I am sure that if you hauled the financial types into court, their defense would be something like housing prices have always gone up so the appreciation would balance the higher rates, blah, blah blah.

Does all of this sound reasonable to some of the members?

If it is reasonable, where is the illegality?

Even if not illegal, it would be nice to see some of those financial instruments types have to get up in public and admit that they were wrong, but that is probably about as likely as a snowball in hell.

Guess I’ll just have to get on with life.

I don't think it can be linked to any one person or job title. It was however greed gone wild, and the same people that screwed up are still there making millions telling everybody that they are the only ones that can fix the system.

In my experience in life nobody is irreplaceable, nobody.

River

It was greed, mostly on the part of Wall Street, but the little guys, lying about their income and buying and flipping houses, contributed to it. I put 99% of the blame on Wall Street; they encouraged such behavior; but there was plenty of greed to go around.

What the others here said.

I don't think the blame rests with a who, it rests with a what. That what is massive deregulation of the financial industry. Once the people who remembered the great depression of the 1930's died off and were no longer in power, suddenly the people in charge of writing laws were left without that institutional knowledge of what happened and the reason those regulations were in place.

I can remember 20-25 years ago hearing people talking about how regulation was bad, it was getting in the way of people making money, and it needed to be done away with. Well the reason it was getting in the way was that it was preventing usury of consumers and provided a guideline as to what the rules of the road were.

That all went away, and to this day certain members of congress are fighting putting any of those regulations back in. Fact is, those regulations need to come back. It kept the system level and prevented huge swings in the financial markets. If those prior regulations had been in place, much of what happened likely wouldn't have.

--LT

Arab Nights (imported) wrote: Sat Apr 30, 2011 7:31 am Who is to blame for the Great Bust?

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Arab Nights (imported) wrote: Sat Apr 30, 2011 7:31 am I am sure that if you hauled the financial types into court, their defense would be something like housing prices have always gone up so the appreciation would balance the higher rates, blah, blah blah.

Does all of this sound reasonable to some of the members?

If it is reasonable, where is the illegality?

Even if not illegal, it would be nice to see some of those financial instruments types have to get up in public and admit that they were wro

Slammr (imported) wrote: Sat Apr 30, 2011 8:53 am ng, but that is probably about as likely as a snowball in hell.

Guess I’ll just have to get on with life.

It was greed, mostly on the part of Wall Street, but the little guys, lying about their income and buying and flipping houses, contributed to

it. I put 99% of the blame on Wall Street; they encouraged such behavior; but there was plenty of greed to go around.

The financial crisis began with the lack of regulation of the banks and financial industry, the risky investments, and the risky home mortgages which were promoted to incourage home ownership for people who couldn't afford it from 1993 through 2000. When the economy slowed down, numerous foreclosures of those risky mortgages resulted in a major financial crisis.

Yes, the crisis materialized during Bush's administration. However, it was caused by events of the previous 8 years.

Mac (imported) wrote: Sat Apr 30, 2011 9:30 am The financial crisis began with the lack of regulation of the banks and financial industry, the risky investments, and the risky home mortgages which were promoted to encourage home ownership for people who couldn't afford it from 1993 through 2000. When the economy slowed down, numerous foreclosures of those risky mortgages resulted in a major financial crisis.

I think that I am in agreement with mac and Losethem. It was the lack of regulation.

It wasn't simply the greed of the mortgage bankers, either. Remember at that same time, the price of gasoline skyrocketed to the $4-to-$5 price for a gallon, caused by greedy petroleum speculators. The combination of these two events triggered the recession. When large numbers of people cannot afford to travel to work, or cannot pay the ridiculous mortgage some greedy so-and-so stuck them with because they're spending all their money on gasoline, things go downhill, rather quickly. Rising fuel prices cost everyone more for everything.

I'd generally agree with Mac. Usually it is a lot of things over time that add up on top of the eternal human greed.

What kind of interested me about my friends comments is that I had never before heard someone with a reasonable argument say that the mortgages were actually planned REQUIRING a significant bump in rates after people were in their homes. It is one thing if it is a function of the general world like what happened in the 70s. It is a completely different thing if mortgages are planned on the QT to have that trap.

Who was Responsible for the Recession

Eight years of Bush/Cheney policies.

Next question.

Moi

It was also Clinton Policies, Bush sr, Reagan, and on, each had a hand in deregulation. The only one of the presidents you cant blame is Obama. He is the one that got stuck trying to fix the mess.

River