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