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Thursday, March 18, 2010

Did the lenders cause the meltdown themselves?

This morning’s Realty Times new feed has an interesting story by David Fletcher in which he interviews Harold Green of the Scollard Group, a national and international housing research and marketing firm. Green makes the case that it was the lenders, who were lured by readily available Wall Street money, who caused the bubble that eventually popped and caused the current financial crisis.

Green’s reasoning is that lenders actually changed their business model away from making reasonable loans and servicing them towards making any and all loans that they could as fast as they could, so that they could package them up and sell them to Wall Street. Their profit center switched from the loans themselves to the sale of packages of loans, not matter how risky they were. Wall street had already created vast pools of money for mortgage-back securities, so there was almost unlimited opportunity for the lenders, no matter how high the risks involved. You can read the story as it appeared today at
http://realtytimes.com/rtpages/20100318_president.htm. It is part one of a 2-part series on the current financial crisis in housing by Fletcher.

To a certain extent Green’s analysis almost makes the Wall Street types look like innocent victims of greedy lenders; however, they certainly share the blame for not policing the risky front-end tactics of the source of all of those mortgages that they were busy packaging and selling as investments. Green actually makes the case that lenders created the market that led to the bubble by creating new and attractive mortgage products to lure in home buyers who were otherwise unqualified, all in an attempt to keep fueling the insatiable appetite of Wall Street for more and more packages of loans to sell.

Green also discussed the limited ability of the government to regulate this while thing, since so much of the money flow was in the unregulated private banking sector of the financial industry. He suggests some remedies, but they are mostly of the “now that the horses are out of the barn” type of hindsight. I look forward to part two of this article.

As in all looks back on disasters, it is also interesting to find those who saw that this was unsustainable behavior and who steered their companies away from these practices. They usually have good stories about trying to warn others and being ignored, just like the guy in this week’s Business Week who tried in vain to warn some people about Bernie Madoff. He was ignored because too many people in the investment world needed Bernie and his scheme to be real – they were in deep and dependent upon him for their living.

Yet, there were Wall Street banks that did not go into these mortgage investment pools big time and lots and lots of lenders who did not chase that Wall Street payoff by changing their lending practices. The irony for most of them is that they are currently being hurt by the lack of credit and liquidity in the market, some of them more so than the big banks that got in trouble and got bailed out. Go figure.

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