Schadenfreude and sub-prime lending crisis

The housing bubble inspired its own tradition of nay-sayers, doomsday predictors and real-estate Cassandras. One of the first on the scene was the Housing Bubble blog, chronicling the story of excesses gone awry and  sellers in denial well into the correction. It is now joined by a growing chorus of sarcastic, bitter voices. For example there is Housing Doom, not to be confused with Housing Panic or  There are even blogs dedicated to local bubbles in some of the major metropolitan areas such as the San Diego Real Estate Chrono-Collapsometer , Seattle bubble and Boston bubble. Clearly it is fashionable to predict doom-and-gloom in real estate.

Mainstream media is taking a different approach. An article CNN/Money ran yesterday posed the question of exactly what caused the crisis in sub-prime lending. (BTW Wikipedia entry defines that as lending to borrowers with FICO rating below 620.) The blame went to mortgage brokers for steering people to incorrect loans, appraisers for wildly over-stating property values, regulators for taking a laissez-fair approach to the industry, lenders for being over-zealous to extend credit, Wall Street for trading securities backed by substandard mortgage loans and of course, real-estate agents for propping up demand with exaggerated pricing.

Curiously left out of the equation are the borrowers who rushed to snap up these loans or investors who decided to gobble up the securities offered by Wall Street. (In a strange case of deja vu, Michael Lewis’s classic Liar’s Poker about 1980s excesses on Wall Street chronicles the story of Solomon Brothers traders successfully creating mortgage-backed securities.) And this blame game is not distributing the credit equally here or taking into account incentives. Real-estate agents are motivated to close deals and sell the property at highest price possible, which leads to all types of subtle tactics to pressure buyers into over-bidding and sellers into accepting a lower bid as chronicled by  Steven Levitt and Steven Dunbar in Freakonomics. It’s hard to fault NARA for that one. But appraisers are supposed to be objective in producing a fair, unbiased estimate of the market value of a property. A real-estate agent standing smug as the client bids a fortune on low-quality, wood-frame construction mass-produced suburban schlock could fall back on the excuse that he/she is only doing the job. So are the traders pushing mortgage-backed securities on eager investors– supply and demand continues to operate in this climate. But the appraiser who sanctions an unconscionable price with speculative valuations is clearly in breach of professional obligations.


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