Who’s Responsible for the Mortgage Industry Fall-out?

Mar 18th, 2008 @ 11:59 AM by MortgageMentor

Every day we hear more news about the credit crisis, or mortgage bubble. The industry, most say, has created its own crisis because of the subprime market. But who is really responsible for what happened? Industry experts (and non-experts) blame many sources:

• Subprime lending
• Credit problems on Wall Street
• The Fed for injecting cash into the system — creating what will eventually be regarded as inflation
• A law put into effect during Carter’s reign, called the Community Reinvestment Act of 1977

Although the mortgage industry is quick to point the finger at the subprime lenders, the fact is that the entire industry avoided proper lending standards in favor of chasing the almighty dollar. As a result, everyone at every level profited, from the brokers who issued the risky loans to homeowners to the Wall Street executives who profited.

Because lenders were willing to offer greater borrowing power, and traditional lending standards were relaxed, the housing price index shot up dramatically. The decline in lending standards can be traced back to the fact that Wall Street needed lots of loan products, and mortgages were an easy way to get them. They generated greater volumes of mortgage loans by lending at higher loan-to-value ratios, offering ultra-low teaser rates, and lending to borrowers who really didn’t have the credit, often not even verifying income and assets. This left plenty of room for two things: fraud on the part of the borrowers, and eventually, the inability to repay the loan.

In the end, the answer to the question of who is responsible is: the entire mortgage industry. But the answer to the question of who pays is: everybody. Not just the home buyers, not just the sub-prime lenders, but everyone who participates in the American economy.