Who's to blame for the mortgage mess?
You know who the victims are. We name some of the villains in a credit crunch built on irresponsible subprime lending in the United States.
Excerpt: ” "Quite frankly, there was a race to lower standards to generate more loans… It was like kids in a candy store. You had to be a complete screw-up not to make money. There were basically no guidelines, no restrictions and no oversight."
No. 1: Alan Greenspan
In his best-selling book, Alan Greenspan describes how well he managed the economy during an "age of turbulence." Unfortunately, he's largely responsible for the current dose of it.
As chairman of the Fed, Greenspan took the federal funds rate down to 1% in 2003 and left it there for a year. Even as the Fed began raising rates, Greenspan's exceptionally low interest rates "planted the seeds for the housing bubble," says Robert Rodriguez, a money manager at First Pacific Advisors who saw the emerging subprime mess early on and has managed to dodge most of it so far.
Greenspan's role in the current mess doesn't stop there. He encouraged th
The use of adjustable-rate mortgages in a 2004 speech, which was "an insane, idiotic recommendation," says Rodriguez. The following year he endorsed subprime loans to help marginal borrowers get into houses. And true to his somewhat naive brand of Ayn Rand libertarianism, Greenspan dismissed calls for more oversight of the mortgage business. This gave free rein to our next culprits: greedy mortgage brokers who had no problem pushing inappropriate loans on borrowers so that they could reap lucrative fees.
No. 2: Countrywide CEO Angelo Mozilo
None of this would have been possible without the help of mortgage lenders willing to go along with the charade. There are many of them, but I'd cite Countrywide Financial (CFC, news, msgs) CEO Angelo Mozilo as one of the most egregious.
Mozilo acknowledged potential risks in the subprime market early on, but he continued to compete to maintain market share, even though the only way to do this was to water down loan underwriting standards like everyone else. "If the market was offering something, they wanted to offer it too," says Erin Swanson, a Morningstar (MORN, news, msgs) analyst who covers the stock.
Even though Mozilo made more than $20 million a year in salary and bonuses in 2004 and 2005, he wanted to book more profits, mainly by selling stock options, as Countrywide was riding high on the bubble. We know this because he took advantage of a special rule to set up an automatic selling program in his company's stock. Company documents show he realized $310 million in the three fiscal years ending in June 2007. If his agenda was to cash out personally, he had a good motive to play along with the subprime charade.
Countrywide declined to comment, but a company spokesman has told other media outlets that no one, including Mozilo, could have foreseen the events that led to the current problems with subprime-mortgage debt and that all of Mozilo stock sales complied with regulatory rules.
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No. 5: The ratings agencies
Money managers may have been blinded to problems with debt instruments backed by subprime mortgages because of their hunger for higher yields. But in missing the cues, they also got a hand from the credit-ratings agencies, which get paid to evaluate debt products and make a call on the likelihood of default. The three big ones are Standard & Poor's, Moody's Investors Service and Fitch Ratings.
"The rating agencies missed something, to be gracious about it," says Don Quigley, the co-portfolio manager of the Julius Baer Total Return Bond Fund (JBGIX). Part of the problem, says First Pacific Advisors' Rodriguez, is that rating these debt instruments was big business, and the ratings agencies were often getting paid for the ratings by the same people who were creating the debt instruments. So they might have been tempted to let their guard down when it came to weighing the likelihood of negative scenarios.
"As far back as 2004-2005 we were aware of questionable underwriting, potential fraud and limited documentation" in the home-mortgage industry, says Rodriguez. "These did not appear to be appropriately considered in the rating process." What's more, risk models used by the ratings agencies assumed continued home price appreciation that would allow marginal home buyers to refinance their loans when their monthly mortgage payments went up.
"We suspect that with so much money to be earned by originating, securitizing and rating, there were too many conflicts to take a very critical view of the process," says Rodriguez. The ratings agencies declined to comment.
No. 6: Mortgage brokers
Home buyers should have known better than to get into adjustable-rate loans they couldn't afford when interest rates reset higher. But I'd single out another party in the industry for the most blame: the mortgage brokers.
For mortgage brokers -- many of whom were independent operators in mom-and-pop shops -- the real-estate bubble was a real bonanza, and their greed got the better of them.
"Quite frankly, there was a race to lower standards to generate more loans," says a former mortgage broker with a major bank in the Chicago area. And for good reason: A merely "good" mortgage broker could easily take home $250,000 a year. But most of them were bringing in $500,000 to $750,000 as long as they cranked out enough loans -- and damn the consequences, says the former mortgage broker. "It was like kids in a candy store. You had to be a complete screw-up not to make money. There were basically no guidelines, no restrictions and no oversight."
http://articles.moneycentral.msn.com/Investing/CompanyFocus/WhosToBlameForTheMortgageMess.aspx
Dont forget the idiot individuals who purchashed these mortgages and kept refinancing to the hilt, who got loans that could never be supported by the income they had.
