Filed under: Personal Finance, News, Housing, Mortgage
Major news outlets are reporting what many have theorized all along: The foreclosure crisis was caused by years of poor bank oversight. The Daily Beast provides this summary on the revelation:
Banks should have anticipated the widespread problems with foreclosures, now under investigation in all 50 states, because they hired so many inexperienced workers and pushed them to blow through paperwork at a superfast rate. At JPMorgan Chase, the hires were mocked as "Burger King kids"-employees who hardly knew what a mortgage was. Overworked drones at Citigroup and GMAC sometimes just threw documents into the trash. "I don't know the ins and outs of the loan," an employee of a lending arm of Goldman Sachs said in a deposition. "I'm not a loan officer." The banks, some of whom have frozen foreclosures, say they were just overwhelmed by the mortgage crisis. But employees and regulators paint a different picture, saying the national paperwork problem took years to create, beginning during the housing bubble, when banks paid a lot more attention to getting more loans and less to actually servicing them.
You can read about this story in depth on The New York Times.
In their article, 'Insiders Ignored Foreclosure Crisis Signals For Years,' The Huffington Post reports:
Insiders anticipated the current foreclosure crisis years before it struck and now, it seems, it must get worse before it can get better.
System-wide flaws in the mortgage industry mean that bank employees and government regulators saw the current crisis coming, the New York Times reports...
"We waited and waited and waited for wide-scale loan modifications," FDIC chairwoman Sheila Bair told the NYT. But reforms never came. The framework for a crisis was in place.
Newser.com details the motivation behind this stunning lack of oversight:
The problem dates back to the housing boom, when banks were so busy figuring out ways to make more money, they ignored the lowlier aspects of actually servicing the mortgages they were churning out. Regulators began warning banks they needed to improve such operations as the bubble began to burst, but banks downplayed the problems-partly because servicing loans, especially delinquent ones, delivers such meager profit that there was "no incentive to staff up," says one former employee. By the time banks finally began beefing up servicing units, the situation was out of control.
See the rest at Newser, which also sources The New York Times.
And how were the banks making money by churning out mortgages? An Investopedia.com story gives a great summary of how selling banks mortgages on a secondary market was driven by Wall Street's interest in buying and reselling the debt:
The increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum...
A lot of the demand for these mortgages came from the creation of assets that pooled mortgages together into a security, such as a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.
You can read in greater detail about the fall out of poor oversight of CDOs and sub-prime lending here, here and here on The New York Times.
When the corporations with a responsibility to lend and manage loans responsibly admittedly hire totally inexperienced "Burger King kids" to do important work, a criminal act against society has occurred. Banks lend money to increase the prosperity of the nation that gives them that power. By law, banks in America are only required to hold 10% of the funds they lend in customer checking accounts as liquid assets (although the amount required is variable). The remaining 90% of their total assets can be used as capital by order of the Federal Reserve to loan money so that this money can grow.
When banks use this money to help one acquire the capital to buy a home, the idea is that the bank will get the money back plus interest. This interest allows the bank to make money and have money for more loans. Loans that can fund an education for better job opportunities, build a business that provides jobs, or help some one else buy a home that will accrue in value, expanding the wealth of the homeowner. Responsible lending helps everyone involved grow their money, for the overall prosperity of society.
When banks, the central institutions tasked with the job of doling out funds that can lead to stable economic expansion, mess up -- well you see the results. What we are experiencing is the result of a critical lack of leadership and accountability where it matters most. Sure, some people took out loans they perhaps should have known they could not afford. But they are not mandated by law with the responsibility to manage the funds keeping the engines of prosperity running. That job falls squarely on the shoulders of banks and bank regulators.
The truth is they royally screwed up, they knew they screwed up, and they didn't do anything about it when there was still time. These are harsh words, but I think it is very important to dispel the myth that poor people, mainly blacks and Latinos, who didn't know what they were doing, or programs meant to help them, are the cause of the housing collapse. Realizing the truth is the only way all Americans will remain vigilant, ensuring that banks and regulators do their jobs well.
How do you feel about this ugly truth rising to the surface? Will it change your trust of lending institutions?
Leave your comments below!