Vail Valley Voices: People borrowed too much
Vail, CO, Colorado
The current economic crisis has reached epic levels, and according to some economists, it rivals the Great Depression.
The financial community is in shambles as banks scramble to find ways to sell off toxic mortgages and other non-performing assets.
But who’s really responsible for this mess?
The politicians have unilaterally decided to place the onus on Wall Street bankers. They say bankers are greedy and didn’t understand the mortgage transactions when they foisted them on “innocent and unsuspecting” hedge funds and other institutional investors.
All the innocent investors are highly sophisticated, so we shouldn’t lament any losses they might have or will incur.
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While Rome burns, the pols are wasting time bashing business executives every day in congressional committees and in ad hoc press conferences to stir up popular outrage.
Since the Beltway wizards refuse to allocate blame to all those responsible for the economic meltdown, I think the media must step up and report the real story about the economic tragedy plaguing our country.
The fact is millions of people borrowed far more than they could afford.
True, mortgage bankers, hungry for finders’ fees, and Fannie Mae were originating mortgages with anybody who could sign their name on a mortgage note. But just because somebody tells you to jump off a bridge, should you do it?
In recent years, Congress initiated a far-reaching campaign that included the creation of Fannie Mae and Freddie Mac. It was intended to enable every citizen to buy a home. It didn’t seem to matter whether applicants could actually afford the mortgage payments.
These same legislators, who empowered unqualified home buyers with easy money, are now endlessly bloviating about Wall Street abuses.
And what about commercial and savings banks that approved mortgages which had no chance to be repaid unless homes financed increased in value? In the old days, a bank wouldn’t approve a mortgage application unless one week’s salary of the applicant equaled one month’s mortgage payment. At that time, banks actually verified the compensation of applicants.
For some reason, these sound practices were abandoned, causing banks to book more and more bad loans.
Regrettably, investment bankers assumed that the rules of mortgage lending were still in force — a fatal assumption — when they packaged mortgage portfolios and sold them to investors. Historical default rates didn’t hold because so many borrowers were unqualified.
So, who is to blame for the current situation? Borrowers knew they couldn’t afford to buy homes. Lenders didn’t analyze the creditworthiness of applicants. Mortgage brokers cared only about originating loans and being paid upfront fees. Investment bankers did little to ensure credit quality as part of their due diligence. And our pols created a fertile environment for a tragedy to blossom.
All of these groups should accept responsibility.
Sal Bommarito is a New Yorker who has skied Vail for 20 years. He will periodically report on national issues that affect Vailites. A former investment banker, he recently published four fictional novels.