The mortgage crisis, like many problems, was the result of many failures. Sub-par loans began when Congress forced lenders to serve low-income applicants and under-served sections of town, against the lenders’ better judgment. Barney Frank was a leader in this regard, but, of course, he and other politicians point fingers elsewhere. Charles Calomiris, a professor at Columbia Business School, has documented the resistance of middle managers at Freddie Mac who, in 2004, cited past experience with high failure rates and fraud resulting from such programs and the likely negative impact on the people who were supposed to benefit from the program. (See Mortgage Crisis)
Lenders then packaged their loans and sold them as securities. In doing so, they no longer suffered the consequences of failures in their loan portfolio. Instead those losses were borne by the investors. Not surprisingly, lenders became less vigilant about the quality of loans when their personal income became tied to the quantity of loans they made rather than the quality.
The blame lies in several areas:
1. Politicians started the problem by pushing for unsound loans.
2. Lenders’ greed, competitive nature and lack of moral strength expanded the problem, rather than controlling it. Note: The people cited in Calomiris’s article deserve plaudits and I’m sure there are many other unsung heroes in the lending industry.
3. Investors overlooked a clear risk in the mortgage securities they purchased.
4. Rating agencies apparently failed to do adequate due diligence.
5. Regulators and politicians failed to recognize the threat and take action (I have not given thought to what action they might have taken that would have been appropriate.) I remember reading that at one point in either the Clinton or G. W. Bush administrations, there was an effort to restrain Freddie Mac and Fannie Mae in some respect, but the Democrats rejected it. I do not know if that action was related to the above problems, nor whether the proposed action would have done any good.
Adam Hamilton, in his little book, Enough describes the problems caused by owing too much money. The problem tends to keep getting worse. The mortgage crisis, as you point out, represents people owing too much money, to mortgage companies that could not sustain the loss. The European financial crisis represents governments owing too much money, and being unable to repay it. The USA is following in the same path, and unfortunately is not taking the painful steps to rectify the problem.
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