Don't hate the player, hate the game!

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I’m one of those people who reads various Business Journals to keep a finger on the pulse of our country ‘s business climate. On any given day, I might browse up to five different city-specific editions to see what’s going on in markets like Phoenix, Atlanta, Nashville, or Denver. Each email summary typically has a link to the “Question of the Day”, which today got me thinking….

Today’s Poll (from the Phoenix edition) was soliciting input on who was to blame for our country’s current mortgage crisis. The choices provided were as follows:

  1. Wall Street for bundling sub-prime securities
  2. Lenders for pushing risky loans
  3. Homebuyers for borrowing beyond their means
  4. Federal regulators lax oversight
  5. Other

As a “recovering financial adviser”, I’d like to think I know something about all angles of this issue. In a somewhat lengthy (on the record) rant on this colossal failure of the mortgage-lending system in America, let’s address these point-by-point of the choices given to this question:

  1. Wall Street– Of course. Anytime there is a huge financial hiccup it’s easy to point fingers at the very institutions that best represent the capitalism which makes this country (and the world) so wonderful. That’s odd, coming from me – for she is the same financial machine, fueled by the greed of Wall Street, I’ve so intimately dated over the years–and our relationship hasn’t exactly been roses. Wall Street (and banking, for that matter) works on the notion of leveraging OPM (Other People’s Money) to create enormous profits for the middle-man. It is the same machine that has built efficient markets for selling bonds, stocks, and other securities over the years that have generally built a lot of wealth for ordinary, passive investors over the years. I can’t really fault “the street” for just doing what they do best, making money by creating markets to trade supply and demand.
  2. Lenders, for pushing risky loans– Hmmm, we might be on to something here. In the addiction recovery business, these people are called “enablers”. As a finance major in college, the key fundamental element of finance I learned is the correlation between risk and reward. The more risk one takes, the greater the anticipated reward for taking said risk. That works well when someone is risking their own capital. In this case, though, the concept of OPM comes into play once again. You see, in order for Wall Street to create bundles of smaller, less attractive individual loans for the consumption by larger, institutional sized investors, those smaller loans must first be made. As the demand for the bundled securities rose, so did the demand by the middle-men for those loans. Well, at some point, as the networks of the mid-tier players in the securities “food chain” became unable to support the demand, they simply began dishing out cash to borrowers of lesser and lesser quality through a further expanded network of mortgage brokers and specialty lenders. You might even be suprised to learn that your local bank actually holds very few of the mortgages it provides to it’s own customers, instead offering to accept a commission from these “upstream” institutions while at the same time, dodging any potential risk of default by the borrowers.

    Did you catch that? Now you have institutions making mortgage (investment) decisions based solely on what information was being collected by third and fourth party gatherers (read: those farther from the ramifications of poor risk analysis) versus their own people. While it’s not really an issue for those borrowers with great credit history, raise your hand if you think this is a good idea when dealing with borrowers with a declining ability to repay borrowed funds. (If you just raised your hand, you must now check yourself into a twelve-step program for those addicted to poor choices.)

  3. Homebuyers for borrowing beyond their means- The last time I checked, the way most people buy a home is to a) gather up personal financial information b) take it to a lender c) see how much they will lend you 4) go buy a house. I can remember the first mortgage application my ex-wife and I ever filled out. When the lender came back to us with the amount they were willing to lend us, I had to be picked up off of the floor. Without much hesitation, the mortgage company was willing to lend us about twice (measured by payment amount) what we were comfortable with. Had we not both been keenly aware of our own responsibilities associated with taking on a mortgage, we could have easily been suckered into a commitment far beyond our means. For the millions of Americans struggling to get by, I think a system fueled by greed put too much faith in Joe Paycheck turning down too large of a loan in an effort to continue fooling his family that everything was better than ever.
  4. Federal regulators lax oversight– Unfortunately, it’s because of a series of unfortunate, repeated, ill-thought-through decisions, the political repercussions of this mortgage meltdown will likely result in a “cure” that will swing the pendulum far in the opposite direction, likely slowing down the number of people taking steps to own a piece of the “American Dream” of home ownership for a while.
  5. Other -Okay, to the people who didn’t choose any of the above options…seriously, what the heck could be “other”?

In the style of the late Bernie Mac, I say, “America, why can’t we all just make responsible decisions and do the right thing. You know people are always going to push to see how much they can get away with!”

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