The finger pointing begins in earnest

In today’s NY Times there is an article about the owners of Ownit Mortgage, one of the first subprime lenders to crumble, and their demise tied strongly to the aggressive demands of their loan purchasers – Merrill Lynch. It basically outlines how Ownit Mortgage owner William Dallas felt pressured by Merrill to open up underwriting guidelines and make more, riskier, stated income loans.

Lenders in California say big investment banks encouraged and pushed them to make risky loans. On Wall Street, bank executives say mortgage lenders became sloppy and did not pay enough attention to fraud. Whatever the cause, Ownit provides a vivid example of what went wrong.

William D. Dallas, the founder and chief executive of Ownit, acknowledges loosening lending standards but says he did so reluctantly and under pressure from his investors, particularly Merrill Lynch, which wanted more loans to package into lucrative securities.

He recalls being asked to make more â??stated incomeâ?? loans, in which lenders do not verify the information provided by borrowers and brokers with tax returns, pay stubs or other documentation. The message, he said, was simple: You are leaving money on the table â?? do more of them.

Personally, I believe that the blame lies squarely with everyone in the game. There is no one party more culpable than the other. The Wall Street banks agreed to buy risky loans, the brokers and banks allowed more risky loans to go through. Both are at fault. The Wall Street banks were smart and wrote extensive legalese in to their agreement letters which stipulated repurchases by the banks and brokers.

Banks and brokers didn’t have to sign those agreements, and they didn’t have to make risky loans. But they did and they (we) have to pay the consequences for failing to perform on our end. Regardless of what Wall Street said they would buy, it is incumbent upon the originator to ensure the quality of loan is at an acceptable level. If the quality is questionable ~~just broker it to New Century~~ then the loan shouldn’t be done, regardless of what Wall Street will or won’t buy.

On the flip side, Wall Street opened up a huge gaping hole with its hunger for profits and let a lot of homeowners and small mortgage companies fall right in to it by buying such poor debt. And that’s what a bad mortgage is – non-performing debt. They should be held responsible for their end of the deal.

The sick part is that thousands of jobs will be lost, companies will be closed, and Wall Street will buy them all up at pennies on the dollar, buy all the bad debt at pennies on the dollar, and sell it all off again; making billions. Cheers to the smart guys over there on Wall Street; way to profit no matter what.