Housing Market: The Blame Game

by: Average Joe Investor

When something goes wrong, it seems to be human nature to look for the culprit. Then, once we figure out whose fault it is, we can then take a big, deep breath and move on with our lives. Right?

Unfortunately (as most of us know at least intellectually), many (most?) problems in life are simply too complex to be able to point at one person or group and say, "It's his/her/their fault!" I'd argue that this is the case when it comes to the current housing market problems that have ballooned out and had serious effects on the credit and equity markets. That said, let's take a quick look at the suspects involved.

The Federal Reserve -

Many are laying blame squarely on the shoulders of the Fed because of the ultra-low interest rate environment that the Fed -- then led by Alan Greenspan -- created after the Internet bubble burst. These rates both gave the spark and the squadoosh to the real estate craze by allowing super-low intro rates and then steadily raising those rates.

Lenders / Mortgage Brokers -

Blame has been put in the court of the lenders and mortgage brokers who pushed exotic loan products on buyers that couldn't afford what they were buying and allowed too much flexibility as far as loan documentation. Many homebuilders like KB Home (NYSE:KBH) and Lennar (NYSE:LEN) have their own lenders or originate the loans for the homes they sell. Even more spectacular was the rise and fall of some of the subprime and Alt-A lenders like Accredited Home (LEND) and Impac Mortgage (NYSEMKT:IMH). And we wouldn't want to overlook the behemoth Countrywide (CFC) here either.

Real Estate Agents -

The blame being heaped on RE agents is similar to that of the mortgage brokers, i.e. pushing buyers toward homes that they really couldn't afford, encouraging crazy loans, etc. They were also able to help propel the real estate mania by advising clients that they market would continue to perform well above historical norms.

Banks / Investment Banks -

This was the group securitizing and selling many of the loans during the RE mania. The complaint here is that these guys were creating the myth that as long as the risk was spread, there was no risk at all. Critics see this group as finding creative ways to sell junk as something other than junk. Goldman Sachs (NYSE:
GS), Lehman Brothers (LEH), and Bear Stearns (NYSE:BSC) are a few of the bigger names that could be cited here.

Buyers -

We don't want to leave out the buyers here. I can buy the argument that the buyer was duped by predatory lender / RE agent / seller in a few cases, but these are the vast, vast minority of cases during a time when real estate was running absolutely gangbusters. Though many buyers may not have fully understood the loan they were using to get their new home, what most of them certainly should have been able to understand is that they were buying a more expensive home than they should have been able to and were not having to put any money toward that house up front. You know what they say about a deal that sounds too good to be true...

Bond Rating Agencies -

Rating agencies like Moody's (NYSE:MCO) were responsible for slapping ratings on the securities that were being produced from all the securitizations. There are many that feel these guys were simply asleep at the wheel, and some that think they were too interested in collecting fees and not interested enough in really exploring how gross some of the loans out there were.

Fixed Income Investors -

Somebody was buying the product churned out by the securitizations after all. Were they really doing adequate diligence or were they being lazy and just relying on the rating agencies? Had they turned off the cash spigot sooner, it would've been much tougher for problems to accelerate.

Hedge Funds -

This is a more recent player, but still significant. This group, which includes the hedge fund subsidiaries of i-banks like Goldman and Bear as well as private hedge funds, used huge amounts of leverage and mixed it with some hubris, aggressive investing, and good ol' fashioned chutzpah to make big bets on the direction of the housing/lending/real estate markets. The ones that were wrong, well, let's just say they caused some problems.

[n.b. I'm not saying the above criticisms are necessarily fair/correct, I'm just reviewing the criticisms.]

You may have figured out where I'm going with this already, but the bottom line is that the situation we're in right now is not one that could have easily been created by the actions of any one of the groups above. Instead, it was all of the above working together to bring us to where we are today. Which brings me to my final culprit:


- If you feel it absolutely necessary to blame this all on one, single entity, let me suggest greed. If it makes it easier, you can even picture it as a little goblin running around messing with peoples' heads and putting bananas in cars' tailpipes (oh yeah, he's that nasty!). When money is involved, it's tough to find anyone who doesn't have a little of the greed monster inside. Generally speaking, though, the markets pit many opposing forces against each other so that the greed of one group typically keeps the greed of another group in check, or at least in balance. Sometimes, this doesn't work so well and you have many groups working in what could almost be called collaboration towards their greedy little ends. These unusual situations don't last forever (cough, cough, Internet bubble) and the result is that participants eventually come to their senses and everyone scrambles to get themselves on good footing. Enter market correction.

In the end, I'm sure we'll continue to see the vilification of one group or another -- we may even end up with some government intervention to those ends -- but to do so is really to overlook the bigger picture.