So who is responsible for the financial crisis, the Great Recession and the period of abysmal growth the nation has slogged through since then?
The question has launched a thousand congressional inquiries, research studies and book deals. It even drew criticism of a story I wrote in which I cite a Federal Reserve Bank of Boston study that believes throwing all of the blame on mortgage industry insiders is not comprehensive enough to cover all of the miscalculations made by everyone on both the supply and demand side of the mortgage lending chain.
The report sparked outrage from a few readers. The premise of the report is that buyers, sellers, investors and the entire market began to function on the premise that home prices would continue to increase, making the risks less transparent.
Here is just one excerpt from a reader:
The low hanging fruit lays in the area of market-driven expectations as the primary source of rapid housing price increases. Tell me something. Do you believe it’s possible that the premise of low underwriting standards allowing otherwise unqualified buyers into the market, and that the increased demand from those buyers was a major force in rapid price appreciation? How about alluding to the fact the mortgage compensation models used during that time highly rewarded “qualifying” and funding these “subprime” loans? The banks and the GSEs had nothing to do with that…right? Wrong! This is not a chicken or egg argument.
What this reader missed (in my opinion) is that no one is suggesting those were nonissues. Just that they were not the only issues. Furthermore, in this post-recession phase, we are no longer dealing with aggressive lending to people who cannot afford mortgages. Lending is, in fact, very tight. And despite many efforts by the government and Federal Reserve to boost the economy via economic stimulus and monetary policy, it remains anemic.
The report analyzes adjustable rate mortgages originated in 2005 and 2006. The 2006 loans experienced a less severe payment shock than the 2005 group, but ended up with a much higher delinquency rate, killing the idea that ARM payment hikes alone caused the problem.
The Fed study suggests a significant amount of time has been spent blaming certain types of loan products when in fact borrowers in some of those riskier loan types managed to keep up with their payments throughout the downturn and recovery. Investors also lost a large chunk of money, believing fixed-income securities were safe because Americans historically paid their mortgages.
Reports like this one add another important layer to the debate that is forgotten: the role of the macroeconomic economy in sustainable mortgage lending.
While an incredible amount of ink has been spent on blaming everything housing and banking related, it's surprising there is no uproar over what policies — perhaps outsourcing and other trends — that are making the jobs situation abysmal enough to impact long-term mortgage stability then and today.
The point of these reports is not to absolve institutions of blame. But to note that playing the blame game can lead down a road where other key factors are ignored.
The mortgage crisis hit five years ago. Despite all the blaming and regulation since then, the world is still in an uncertain recovery. It's worth asking whether other economic trends played a larger role in sending the system in for a crash landing.