Who is Really to Blame for the Credit Crunch?

Most of the country is beginning to feel the ramifications of the housing crunch and credit crunch right now. There is no single entity to blame for this massive downturn in the economy, however. So who can we blame for the credit crunch? We can definitely blame the brokers, the banks, wall street, the government, the borrowers, the sub-prime market and our ridiculous expectations, right? Let’s break this down:

Can we blame the brokers?

If we compare the real estate market to a drug market, brokers are just dealers in better suits. They find customers, they find loans, and they make a commission off of the sale paid for by the lender. Mortgage brokers are involved in roughly two thirds of all home loans, making sure that the borrower has the money to pay the loan back, and they must also make sure that the property holds its value in the event that a foreclosure occurs or a loan is defaulted on.

Can we blame the banks?

Banks are involved in some way in nearly every single home loan situation, because they are ultimately who has to come up with the money that the borrower will use to purchase a home. At least 1/3 of all home loans are given directly from the bank to the home loan, while the other 2/3rds involve a middle man, the brokers or “dealers” mentioned above. Many banks have been working more closely with borrowers in recent years, but many loans are still outsourced to the brokers.

Can we blame Wall Street?

Many large Wall Street firms are responsible for purchasing home loans from banks, sometimes in numbers as high as several hundreds or thousands at a time. Then they bundle these loans into packages for other investments depending on the level of risk involved in the leans.

Can we blame the Government?

Opinions are all over the lot when it comes to whether or not we can blame the government for the credit crunch. Some say that the government does not do enough when it comes to policing the industry while others say that the government does more than enough and should hold no blame. Different politicians like Barney Frank and Ron Paul have greatly differing views on the subject. What we do know is the government is partially responsible no matter which side of the debate you take.

Can we blame the borrowers?

The borrowers are the final buyers, and the people who are actually using the home loans. Responsible borrowers would match future payments to future income, but not everyone can do this. The demand for borrowers has never been as high as in the most recent years, so lenders are coming up with all kinds of new ways to entice borrowers into taking up loans even when they cannot afford them.

Can we blame the sub-prime mortgage market?

Sub-prime mortgages are making it easier for people to get the homes that they want even when they cannot afford them. Prime mortgages and sub prime mortgages are making it easy for people meeting certain criteria to get the homes they want even if they do not have the financial stability to keep up with the payments. Sub prime mortgage loans definitely should share a large portion of the blame, but who is to blame for them?

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