Everyone You Can Blame For the 2008 Mortgage Meltdown
With the mortgage industry in the throes of its worst era since the GFC (Great Financial Crisis), comparisons are inevitable. If you didn't live through the GFC as an originator, now is not like then. The current problems are almost exclusively driven by interest rates and inflation, and there is a strong sense that the housing and mortgage markets will be just fine in the future when rates move a bit lower.
The past problems were broadly driven by just about everything else. And there was a strong doubt as to whether the industry or the economy was going to survive or ever be quite the same.
So about this "everything else," who's to blame for the GFC? The following list would grow into a novel if we went into detail on each line item, so for now, we'll start with single sentence bullet points. PLEASE NOTE: this is not intended to be a thoughtful research piece. Those have been done to death, and in many cases quite well (e.g. even the wiki page on gov policy role in the crisis is outstanding). This is just 27 bullet points off the top of my head on a Friday morning because I'm always telling people there are 27 things to blame for the GFC. In truth, there are many more, but this is a decent start to a list.
The overarching theme is that "it took a village," and it was more about group-think and brushing risk under the rug than malice. Whether you want to use the word "greed" is up to you. It certainly existed in many cases, but it's simply on the darker side of a continuum that begins with something as benign as being trusting and uneducated about risks.
1. Borrowers - Some were greedy. Some just wanted to keep up. Many just saw housing as good investment given all the appreciation and the easy loan programs. They wanted the loans. They wanted the house. Many of them wanted to sell the house before it was even built because their friends just made $100k without spending a dime. Many of them didn't realize that was an unsustainable dynamic."
2. Originators - In many cases, LOs sold what they were provided with from lenders and what borrowers demanded. In other cases, LOs bordered on or committed outright fraud to slam deals through in a wild west lending environment. This includes asking for "favors" from appraisers, title companies, realtors, and of course, from their investors.
3. Appraisers - You couldn't hardly survive the pre-GFC era if you weren't willing to be a bit fast and loose as an appraiser. LOs and realtors wanted the value and if you didn't provide it, you were replaced. Appraisers definitely got shafted--especially the honorable ones.
4. Realtors - They'd help you buy or sell anything without regard for affordability or the sustainability of price trends. They assured borrowers that prices only go up. They added pressure on appraisers just like LOs. They also pressured LOs to get things done.
5. Non-Retail Bank Multi-Channel Lenders - This is one the layers of money between Wall Street and mortgage originators. Think Countrywide. Multiple channels of lending, but one main entity creating products and guidelines. These lenders got looser and looser with guidelines and underwriting in an attempt to A) keep up with the Jones and B) because there hadn't been any obvious fallout since prices only ever went up.
6. Retail bank lenders - The history books would have you believe they were innocent, but anyone originating loans at the time knows this is far from true in most cases. Some of the banks were relatively innocent in that they were merely providing a channel to access loan programs determined by Fannie/Freddie, but most also had "Alt-A programs with guidelines and pricing designed to compete with the likes of Countrywide's Fast and Easy program."
7. Wholesale Subprime lenders - Not banks. Not multi-channel lenders that allowed mortgage companies to underwrite their own loans. Some of them kept their loans on the books. Many of them sold into larger wall street entities (i.e. there was no "Lehman Brothers Mortgage" subprime rate sheet). They specialized in low credit scores and bankruptcies, but also allowed very high loan-to-value ratios. As high as 100% in many cases.
8. Mortgage brokerages - Companies that existed exclusively to originate loans that were then brokered to wholesale lenders. Took most of the blame for the GFC. Many were greedy, but for most, no more so than the average mortgage company.
9. Mortgage bankers - This is a pretty broad term, but in this case, it refers to companies that existed exclusively to originate loans that COULD be brokered, but more so that could be underwritten in house and then sold to a larger investor. In rarer cases, these lenders may have held a few loans on their books, but we're talking very rare. They were guilty because they thought they were walking a higher road than other originators, but in many cases, it ended up simply being another avenue to slam deals through with your own in-house underwriter.
10. Underwriters - Poor UWs! Rock and hard place just like appraisers. Some held firm and did the right thing. Some turned a blind eye. All were unknowingly participating in giving people loans that should have had them.
11. Hedge Funds - Loose term here too because many would consider Lehman to be a hedge fund by the time things got out of hand. But this refers specifically to money managers promising their clients big returns. They created demand for riskier and riskier products with higher returns. They helped turn a blind eye to the risk when selling these investments to their clients.
12. Investment banks - Lehman, Bear Stearns, Morgan Stanley, Merrill Lynch, Goldman -- all examples of investment banks, but the first two were particularly problematic leading up to the GFC. Lehman, for example, bought several subprime and alt-A lenders either without understanding or caring about the inherent risks in how they were doing business. They then sold the packages of loans/derivatives to hedge funds and others without accounting for said risks.
13. Ratings agencies - rubber stamped the risky investments in question
14. Alt-A lenders - technically not much different than subprime, but for example, Alt-A would let you do some crazy stuff if you didn't have a bankruptcy, whereas subprime was geared more toward super low credit scores and bankruptcy. These are the lenders that offered programs like 100% loan-to-value with no proof of assets or income, on INVESTMENT PROPERTIES!
15. Title companies/escrow officers - many were not part of the problem. Many were--often taking part in hurrying borrowers along through signings they didn't understand.
16. Option ARM lenders. Giving this its own line item even though Option ARM lenders were often simply Alt-A lenders. World Savings was the most notable example, but other companies followed suit. Option arms gave borrowers the option to pay less than "interest only" payments with the deficiency added back to the loan balance. What could go wrong?
17. Talking heads - So many people got on the TV and said everything was gonna be just fine even when many of us already understood that wouldn't be the case. While we could make the list bigger by adding categories, we'll just include "economists" here too as some of them were cheerleaders for housing policies that arguably backfired.
18. Ma and Pa investors - created demand for stuff they didn't understand. Arguably innocent in many cases. Arguably greedy in others.
19. Builders - Churn and burn! Builders built as much as they could, as fast as they could, as cheaply as they could because demand was just off the charts. They really didn't CAUSE the GFC in the same way much of the rest of this list did, but they definitely participated in it--sometimes as simply as by accepting purchase offers with little or no money down, a substantial list of upgrades upfront, often inflating a home's base price by 20%, and simply trusting the mortgage company could get the loan done.
20. Fannie/Freddie - Their guidelines were loose enough prior to the GFC that you wouldn't recognize them today. They bought a ton of crap loans ($trilliions)
21. HUD - pressed Fannie/Freddie to buy more crap loans. Also bought crap loans.
22. Legislative government- Where were you guys BEFORE the GFC?! You were making well-intentioned policy changes with unforeseen complications. Granted, it's debatable, but there's no question that the push for looser lending standards has at least some influence from affordable housing legislation. Plenty of dead horse beating after the fact. Well done. We will lump regulatory changes under this category as well, e.g. the SEC relaxed capital standards in 2004 (but this is debated as a cause of the GFC).
23. Executive government - Clinton was a popular president. But changes to housing policies are argued by some to have paved the way for the past 3 bullet points. And let's not forget about the Commodity Furtures Modernization Act of 2000, which de-regulated the derivatives that ended up playing a key role in the meltdown
24. The Fed - Yo Alan! I know "irrational exuberance" didn't occur to many of the people in the housing/mortgage market, but it would have maybe saved some pain if it had occurred to the Fed. Hindsight is 20/20, but as long as we're sharing blame, you get some.
25. Mortgage Insurance companies - Not the baddest actors pre-GFC, but their total net risk and risk-to-capital figures were clearly surging in the run up to the GFC
26. Mortgage Servicers - didn't CAUSE the GFC, but made it much worse and more protracted by acting like just about the worst scum on the planet when it came to lying to people in order to keep the risk of defaulted properties on consumers' books. It wasn't uncommon for someone to stop paying their mortgage during the GFC and not be foreclosed on for 4-5 years--all the while being hounded for payment or sent through a fake process that made the consumer think they were participating in some government program to hand over their property with a bit more dignity. The other side of the coin was the "robo-signing" scandal where banks foreclosed on homes TOO quickly and without the proper documentation.
27. MERS - It's complicated, but another entity that made things worse despite not acting as an initial catalyst.