by Tom Klein

Created on: October 19, 2008   Last Updated: October 27, 2008

Financial Crisis: There's Plenty of Blame to Go Around

Oh, where to start, there is so much blame to go around. Let's start first with loan officers and complicit customers who together completed mortgage loan applications for adjustable rate mortgages that depended not on the customer's "stated income" (wink-wink), but on the ability of the homeowner to refinance into a fixed mortgage before the adjustments kick in. After all, home prices only go up, and there will be an endless supply of credit for refinancing later. In other words, teaser rates and fudging one's income were just part of the game that everyone was playing to get on board the home ownership wealth escalator.

We could also blame Fannie Mae, Freddie Mac, and Congress for providing an endless supply of credit at taxpayer expense for the banks and mortgage companies to make loans to homeowners. Fan and Fred purchase mortgages and also repackage some mortgages they buy into mortgage-backed securities. Those securities are sometimes further repackaged by investment banks into structured investment vehicles (known as SIV's). Fan and Fred had certain underwriting standards that mortgages had to meet, but sometimes third parties such as builders or non-profit organizations would satisfy some of those standards for the homebuyer. For instance, a non-profit homeownership charity might make the down payment for a customer allowing a customer to get a Fannie Mae conforming loan where a 3% or 5% down payment was required. Thus, Fan and Fred accepted a lot of poor mortgages that really did not meet their underwriting requirements. And we need not even mention Fan and Fred's lobbying Congress to increase Fan and Fred's borrowing limits and lighten federal oversight of their mortgage operations.

Congress is ultra-blameworthy. Not only did Congress not reign in the growth of Fannie Mae and Freddie Mac, it also pressured both to relax their underwriting standards so borrowers with low to moderate income could qualify for loans. These groups had the highest default rates throughout the credit crisis. Fan and Fred purchased literally trillions of dollars of mortgages, and sold some by packaging the mortgages into mortgage-backed securities. Fan and Fred sold debt in the debt markets to raise capital for their mortgage operations. Many banks and other institutions bought that debt on the assumption that Congress would support Fan and Fred should they run out of capital. Rather than Congress shrinking that taxpayer

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