by Louis Georges

Created on: February 24, 2009

The pundits have been quick to blame the housing crisis on people whom they deem to have bought homes beyond their means. While in many cases, people did buy homes they could not afford, it is neither fair nor correct to lay the blame on the shoulders of these individuals who simply aspire to the "American dream" of home ownership. In fact, these individuals are the primary victims of those who really are at fault.

The term "mortgage-backed security" was little-known to the general populace until the demise of Bear Stearns. Only then did it become widely known that Wall Street had been actively speculating on residential real estate. The mortgage-backed security is an instrument that reduces the investor's risk by allowing the purchase of pieces of multiple different mortgages. The failure of any one of those mortgages is, in theory, offset by the gains from the others. As real estate values continued to climb, these investments became increasingly popular.

With such demand for these high-performing securities, investment firms did not spend a great deal of effort in evaluating the quality of the mortgages that formed the basis of the investment. The focus was on quantity, and there was considerable pressure to provide more paper to sell to investors and for the rating agencies to rate these securities as high-grade investments.

Mortgage brokers were incentivized to provide as many loans as possible. The originators of these loans were aggressively looking for ways to satisfy their Wall Street customers, who were hungry to purchase every mortgage they could find. They became creative. For people who had difficulty qualifying, new programs were created. "Zero-down" and "stated income" loans became commonplace. Teaser rates were offered that would make a loan affordable at least long enough to get it sold.

Nave homebuyers were sold homes they could not afford by avaricious mortgage brokers who were anxious to make a sale. The lower-income homebuyers who are often blamed for the housing market collapse are typically unsophisticated borrowers who rely on their lender's representative to be honest and look out for them. Even if the mortgage broker does not intentionally deceive the borrower, the failure to properly educate an unsophisticated borrower on the nature of the product can still result in bad loan. Many borrowers ended up with loans that they did not understand and were caught by surprise when their rates and payments adjusted upwards after a few months

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