One recurring question that we're seeing on our sister site, BankingQuestions.com is "How did we get here? What led up to this banking/financial crisis and the need for such drastic action as a bailout?"

What are your thoughts? We know some of you will have some strong opinions on the topic, so we are prepared for some mudslinging and name-calling, but please, don't attack one another.

NOTE from Mary Beth: As with all the other threads in this forum, the purpose is to gather information that can be used to write articles for BankingQuestions.com, our sister website that is designed for bank customers. So, keep that in mind when you write your responses.

Greed of the "fat cats" on Wall St will get a lot of ink. However; just as much blame goes down to the individual homeowner buying in to a deal that was too good to be true. Even conservative folks became liberal with their finances. In the face of these unsound practices our haste to import products and export jobs only served to increase the pressure.
I'm not sure a bailout is necessary or deserved; but I would bet one will be forthcoming!

For a newbie poster, you sure hit a lot of nails right on the head.

Political jockying has also played a part in this. McCain cosponsored a bill back in 2005 designed to better regulate Fannie & Freddie in hopes of preventing just what's happened. The Dems voted it down. This type of partisan krap leads me to believe we need to abolish the two party system and just nominate the best candidates for the job. With no party affiliation to honor, maybe things would finally get done.

It is interesting that no one is looking at the actual originators of these loans; some from mortgage companies, some from regulated banks. During the late 90's and until last year when the @#$% hit the fan, these originators, most on 100% commission, would refinance the same loans over and over every time there was even a minor drop in interest rates or an uptick in housing prices. With each refinance they would roll in closing costs to the principal balance and extend the term back to 30 years so that the payments would actually be slightly lower. All the average homeowner would care about is that the payment was lower. Then, of course, the loan would be sold to a GMAC, Countrywide, WAMU, etc. I saw loan originators do this on a pretty consistent basis. I saw many of them make millions through this time period. This very common practice is why so many homeowners are now underwater on their mortgages.

Illegal, no; but certainly unethical in my opinion.

A complete and total failure to learn anything from history.

I have a question.

I don't understand why homeowners want to cash out any equity they have in their house the second it is there. Doesn't anyone want to own a house debt free? Maybe I am just an old [censored].

With the limited amount of tax deductions out there, many people would rather have a tax deductible second mortgage than say, a car loan. Makes sense to me.

McMansion Mania!

(I want my 5,000 square foot house NOW and I don't want to wait!)

(Oh, and I'd also like a side of fries with that order, supersized!)

I agree with renniks. I would also add in every developer, real estate broker, title insurance closer, attorney and, of course, the homeowner. I am so frustrated by the lack of what I consider general ethics and accountablity in this country.

Sample scenario:

Greedy developer buys land from farmer (farmer received years of govt help - but profits millions on the deal and doesn't have to pay Uncle Sam back a dime.) Greedy Developer builds houses that all look identical and pyramid its costs on its other developments and/or creates a nifty little tool (SSA tax) to help pay for the improvements. Greedy Lender lends the money to keep the scheme going. Greedy Community People (Mayors, etc) eat up all the BS the Greedy Developmer tells them on how this will put their community "on the map". (This costs communities thousands of dollars in increased costs for police, fire, schools, roads, etc.). In the Greedy Developer's development, Greedy Real Estate agent sells homes to sometimes unsuspecting, but more likely unethical people, who think I will buy this house and flip it for a huge profit! Sometimes Greedy Real Estate Agent failed to properly explain SSA taxes, real estate taxes, improvement costs including home owners associations. Borrowers/buyers get loan from Greedy Lender or sometimes the developer that are explained as a great deal if you plan to move in 2-3 years (before the ARM adjusts). Just look at how low your payment will be!!! Greedy and Unethical lawyers show up at closing and DO NOT explain any of the documents to the borrowers/buyers or COUNSEL them appropriately. Or greedy borrowers/buyers don't hire a lawyer or care what the documents say because they are going to flip it! Suddenly, even though there were plenty of pre-warnings, the real estate market collapses, and everyone in this chain is pointing their fingers at someone else. Borrowers/Buyers are now upside down, developers pyramids collapsed, lenders' loans are going bad, cities are going bankrupt trying to provide social services to people who can't pay their taxes, and the hard working person, who has been in their house for several years and has acted financially and socially responsible will have to pay for all of this mess!!!

OH! I forgot the bank examiners. They were so complacent with their exams. I would actually give them fineable information in a report on a nice gold platter and they WOULD NOT FINE US!!!!! "Oh - your over your lending limit, but that development is selling nicely and if we fine you, well you might fall under well-capitalized and then we would have to do a lot of paperwork, so let's just keep our fingers crossed the development sells out fast-before we have to come back..."

I just believe if people would have stepped up and said "this is isn't right!" maybe we wouldn't be in this mess.

Sorry if I offended anyone with this - but this subject really gets my blood boiling.

Greed, on the part of applicants who wanted a home they could not afford.

Greed, on the part of realtors who would sell any house to anyone, as long as they could get a mortgage commitment and their commission check didn't bounce.

Greed, on the part of lenders who wanted to make as many loans as fast as possible, pocket fees and commissions, and sell them off to the next person in the game of Old Maid.

Greed, on the part of the companies that securitized the loans, never checking to see if the loans were properly underwritten.

Ineffective supervision tantamount to culpable negligence on the part of government regulators, who would be all over the small financial institutions--whom they could bully--while letting the large institutions run wild.

And that's just for starters.

I am asking (because I don't know the answers):

Who came up with the concept of "reduced documentation" and stated income loans?

Who came up with the idea of option ARMs?

Why did anyone think 40 or 50 year mortgage terms were a good idea?

I would like your views on this.

Very good questions, MB. When I was an originator, all i's were dotted and t's crossed and down payments were required AND verified! There was no such thing as reduced doc and forbid anything called 'stated income'...geez!

Some really greedy folks had to do some mighty fast talking/bribing or SOMETHING because the FNMA I grew up with would have laughed at the idea then.

95-125% financing and arm loans were precarious, but the real culprit during the low doc and stated income era is interest only loans. Ironically, there are still being offered out there. I am concerned even with full doc and income verification, interest only loans will continue to cause major impacts.

The problem statred with the government. They statred with community homebuyer loans and actively encouraged lenders to make loans with 3% down. Then that was expanded to 0 down as long as the buyer had some homebuying education. Then the conventional and subprime market got in the act.

underwriters were told to ignore basic underwriting principles, instead focus on the community redevelopment programs.

I'd like to share an email I recieved from a dear friend this week. She's not a banker:

"I have the bailout debat on...been listening all morning. Something that no one addresses, because this is not the forum for it, is that Americans have been overspending for too many years. Purchasing of homes that cannot really be afforded (the purchaser at as much fault as the lending institution) and everyday purchasing beyond ones means. It is funny that our government (and I'm a republican) thought that people needed to spend more...easier to say than to have people become responsible for the debt they themselves have taken on already.
This is all so huge and convoluted. The auto industry said that if something isn't done then they are going out of business. Currently, auto loans can only be given if you have a credit score of 7.2 or higher. Okay, so this goes back to us (Americans) having horrible credit scores because we mishandle our own money. So now, we are wanting the government to do something so that I, a poor handler of my money, can get in more debt by financing a car. Doesn't make sense to me. I want to know how the "big guys/gals" are receiving tons of bonuses and raises while their companies are being bailed out? Even after making this bailout, are they going to get more jobs back for the thousands of Americans being laid off right now? So glad that my faith and trust is in God and not our government. I sure do appreciate all the hard work, though, that these politicians are doing. It is obvious that they are putting a lot of discussion and combined wisdom into this."

I think she really hit the nail on the head.

Mary Beth:

Here is an article stating that the option ARM was the creation of Golden West, now a part of Wachovia:

http://www.slate.com/id/2188982/

it sounds like it was a product designed by a California organization primarily for the California market of fast rising home prices--

Reading some of the most recent articles on subprime, prime alt-a, and option ARMs; it doesn't seem like $700 billion will cover the problems - isn't that a pleasant thought!!!!

We are only working through losses from the subprime ARMs right now, with the Alt-a and option ARMs problems not showing up to later in the downturn. If that is the case the Federal government may end up owning much of California, Arizona, Florida and Nevada.

There's lots of talk about "greed". Greed's nothing new. People have always been greedy. So what? That's not the reason for this mess anymore than the fact that people have to eat is the reason there's grinding poverty in Cuba. Just like the need to eat, greed is universal. The question is what is particular to this situation.

We decided to let Freddie and Fannie, these private-profit/public-risk entities, off the hook over their accounting scandals. In exchange, they promised to do more to expand American home ownership. Unanswered was the question about where the Constitution authorized this as a function of the federal government. Anyway, Freddie and Fannie tinkered around a little with their approvals, but the big thing they did to keep that promise (and expand their profit margins, temporarily - and therefore management bonuses) was to buy up high-yield subprime paper funded with low-cost agency bonds carrying that then-implied and now-basically-explicit US government backing.

Without these institutions buying this paper, there would not have been a significant market for it. After that, the investment banks started buying it, with their mind-boggling levels of leverage, the mega-commercial banks formed their SIVs and used their blue-chip names to borrow at relatively low cost to purchase this stuff and keep it off balance sheet (boosting their non-interest income), and employing massive leverage through the back door that they never would have gotten away with if it was on the balance sheet.

Taking a step back and looking at the situation, it's just dumbfounding how massive this is. Thanks Senator Sarbanes! Thanks Congressman Oxley!

A % is due to sales personnel in bed with underwriters.I have seen sales reps made to be in charge of underwriting departments. Bad combo!!

This article told me exactly who was behind this from the very beginning:

http://query.nytimes.com/gst/fullpage.ht...mp;pagewanted=1

Paragraph 3:

"Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits."



Regardless of your political affiliation, it's time to take a hard look at the facts...educate yourselves...this affects not only us now...but OUR CHILDREN'S future.

Unfortunately, most Americans are focused on the here and now...WE ALL NEED TO CHANGE OUR MINDSET AND FOCUS ON THE FUTURE IMPLICATIONS OF THE DECISIONS WE MAKE TODAY!

oh oh

Citi acquires Wachovia, thereby enjoying all the "benefits" of those option ARM's.

Someone sent me this link from U-Tube on the situation. It runs about 9 minutes long and may (by some) be considered politically motivated.

http://www.youtube.com/watch?v=H5tZc8oH--o

I've been dealing with mortgages for some time and can remember much of this firsthand.

I think much is to blame on the secondary market who purchased home loans. They created loan programs that any reasonable person questioned. A loan program where the "prospective future income" of the borrower was used to determine if they could afford the monthly payments (Did they forget that the payments were due now, not in the future???). Borrowers income could be padded with renting out rooms within the house they were buying or with a non-existant home based business or second job. Some people knew they could not afford the payments but truly believed that they would obtain a better paying job in the near future so they went forward with the loan anyway.

I do not feel sorry for these people. The lenders created the programs but no one forced these people to obtain the loans. Many smart people did the math and did NOT buy into this scam and they should not be punished by having to bail out all the other people who are unscrupulous, greedy, or just plainly not that smart.

SB, your link isn't to a specific video. Could you try posting it again please?

I have no sympathy at all for the borrowers who participated with the mortgage originator to falsify loan documents regarding income and amount of funds on deposit in order to obtain these loans. I can't see how even the most unsophisticated borrower y didn't know that lying was wrong.

The borrowers who were taken advantage of and lied to by mortgage brokers have my sympathy. We don't seem to do a very good job of financial education in this country. It seems to depend on your family's fiancial acumen whether or not you just trust everything the originator says or question and read the documents with understanding before you sign. Let's face it - most loan notes and documents are written well above the 5th -6th grade level that seems to be the reading comprehension level of the majority of Americans.

I would have to say that not only greed on the part of everyone involved in the process - including the borrower but also lack of financial education and blind trust on the part of some borrowers contributed to this problem.