Minorities and risky folks caused the markets to fail?

I’ve spent a lot of time watching the subprime meltdown unfold.  The media-made moniker for the nation’s financial crisis is somewhat misleading, as it implies that subprime mortgages are entirely to blame for this mess.  Earlier this month, Neil Cavuto (FOX News) alluded to it on the air, saying the government should have known that “loaning to minorities and risky folks is a disaster.” 

Mr. Cavuto, like many others, either does not know what really happened or is choosing not to acknowledge it.  I believe it’s the former, but anyway, forget what you heard about minorities and risky folks.  From homeowners to lenders, Wall Street execs to legislators, this is about good old fashioned greed.

While it may be true that subprime mortgage defaults set it off, every one of those mortgages came from somewhere.  And that’s a decent place for the blame game to begin: mortgage lenders.

Subprime mortgages are home loans for people with poor credit and/or any other qualities that make them risky borrowers.  Prior to 2001, it would be difficult for someone in this category to get a loan and if they got a loan it would come at a huge cost (exorbitant interest rates).

After 9/11, interest rates dropped making loans more affordable.  Mortgage lenders relaxed their standards and at the same time began pushing “creative” financing.  These loans had seemingly sweet initial features like adjustable rates and optional payments, which would eventually reset to much more expensive terms. 

According to the Federal Reserve Bank of St. Louis, subprime mortgage originations rose 270 percent (in dollar value) between 2001 and 2006.  In 2006, approximately $640 billion in subprime mortgages were originated.  Since then, more than 100 subprime mortgage lenders have failed or filed for bankruptcy.

Did the lenders know this was risky?  Absolutely.  Did they care?  Not enough to stop.  After all, new loans generate commissions, fees and interest payments, which are higher when the borrower is risky.

The bottom line: this is much deeper than risky people skipping out on mortgages. 

After lenders and risky homeowners, the regulators, investment bankers, rating agencies, investors and legislators need to fess up to their roles in the near collapse of U.S. financial markets. 

Next time: Regulators and investment bankers

10 Comments to ‘Minorities and risky folks caused the markets to fail?’:

  1. Stephanie on 1 Oct 2008 at 2:07 pm: 1

    I thought the blame was primarily on the Bush administration due to its push for deregulation which allowed these risky borrowers to get the mortgages in the first place.

  2. tisa on 1 Oct 2008 at 3:27 pm: 2

    The Bush administration definitely added to it, but the wheels were in motion before W. Under Clinton, there was a push to repeal some of terms of Glass Steagal (1933) with the signing of Gramm-Leach-Bliley (1999). There are too many contributing parties (for me) to accurately prioritize but I agree gov’t would definitely be high in the rankings.

  3. Pierce on 1 Oct 2008 at 4:03 pm: 3

    I’m curious – how much has the $1,000,000,000,000-plus that have gone towards the war in Iraq infected our financial market? I’m not global finance-savvy enough to know if that has any connection to our internal financial crisis.

  4. Pierce on 1 Oct 2008 at 4:08 pm: 4

    Correction: to date, the Iraq war has only cost us $845 billion. However, the estimated total cost to the U.S. economy exceeds $3 trillion.

  5. Tisa on 1 Oct 2008 at 5:28 pm: 5

    Well, the war is contributing to a large budget deficit since the government is borrowing money (through bonds) from several countries to pay for it. One big link between 9/11, the war and the current crisis is low interest rates. The government lowered interest rates after 9/11 and a ton of risky mortgages were granted and used as collateral for mortgage backed securities. Securitization is what played a gigantic part in turning mortgage defaults into a crisis. I’ll cover that and the mortgage backed securities (MBS) market in my next post. The low rates also helped devalue the dollar. The average person could see the impact of this with higher prices or later on higher taxes.

  6. Hayes on 1 Oct 2008 at 9:22 pm: 6

    I agree. This has been building for a loooong time. I think that our country is at a critical point in history. What happens over the next few days will affect the next 7-10 years. It is sad and unfortunately shows a side of America that loses a LOT of respect in the global community. How can Capital Hill focus so much on the “haves” and vaguely acknowledge the “have nots”?!

  7. Ishmael on 1 Oct 2008 at 10:57 pm: 7

    Anything said on FOX needs to be run through a BS filter.
    The amazing thing is that Merrill Lynch and Wachovia got suckered into paying mega billions for companies writing toxic waste mortgages and that AIG rushed into areas that Buffett chose to avoid like the plague.
    I suspect that the Bush administration wanted to devalue the dollar to increase exports and hinder imports.

  8. Stephanie on 2 Oct 2008 at 8:42 am: 8

    Well, I’ll tell you what! When I got my house, my mortgage was FOUR TIMES my annual salary AND I had a dependent for whom I received NO support. Fortunately my income increased, but I saw first hand how they pushed and pushed for me to borrow as much as possible even though I could not afford it. The truth is, I knew I couldn’t afford it, but I hoped and prayed that I would find a way. Blind optimism probably plays a part in people taking on more debt than they can handle. The really sad part is that once they realize they can’t afford it, why don’t they DO SOMETHING instead of waiting for forclosure??? Foolish pride I guess…WAKE UP PEOPLE! (The people I’m talking about probably won’t read this blog. Maybe I should go to Philly with a milk crate and a loud speaker and preach about living within your means.)

  9. Tisa on 2 Oct 2008 at 10:07 pm: 9

    I’m with you on the greedy lenders. The first mortgage broker I went to got me a no doc pre-approval letter for seven times my salary! No-docs cost more and nothing in my profile suggested that I needed to go that route…or get a house that big. Get me a matching milk crate and let’s hit up South Street :)

  10. Tamala on 9 Oct 2008 at 6:26 am: 10

    Its false and limiting to simply “blame the minorities” It was a vicious cycle that involved the Lenders,Banks, Mortgage Broker, Realtors, and the federal government. It was greediness that create the current state.

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Published on October 1, 2008 at 10:19 am. 10 Comments.
Filed under economy,ignorance,news/politics,television.