Pyramid of Greed

by Morgan on July 19, 2008

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I’ve been reading a lot of articles on the Web these days with different groups blaming each other for the collapse of the housing market. It’s annoying. The housing collapse and credit crunch are too big and too wide-reaching for it just to be the fault of one group. There was greed at all levels of what I’m terming the Pyramid of Greed.

From home owners maxing out their cash-out refis to real estate agents encouraging buyers to “stretch” to mortgage brokers manipulating W2’s the greed went up and up and up right to the office of the President.

So from now on, for those on this pyramid, please refrain from absolving yourself of any culpability in this mess. If you’re on this pyramid you played a part.

Update: I updated the term “Mortgage brokers” to “Mortgage originators” and added a Power arrow to show how the power flowed through this pyramid. I’m not sold on the word Power though - if anyone has a better idea, let me know.

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Tom Vanderwell 11 months ago 1 point
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Hey Morgan,

Can I use your Pyramid of Greed in a post I'm working on for next week? It would fit in perfectly and I'll give you credit for it?

Tom

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morganb 11 months ago 1 point
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sure go for it tom!

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Dave Wirsching 11 months ago 1 point
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Excellent - I loved pyramid charts when I was a consultant. Only suggestion is that the model implies one of two things. 1) A progression from top to bottom, or 2) the size of culpability based on the width of the "slice" IMO the most culpable are at the top of your pyramid.

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http://www.clearingtitle.com

morganb 11 months ago 1 point
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Great point Dave - I was thinking power from top to bottom. I'll make that
clear somehow.

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Rhonda Porter 11 months ago 1 point
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Great visual EXCEPT I would change the term "mortgage brokers" to "mortgage originators". Lenders who work for mortgage-banks (like WaMU and Countrywide) shouldn't be excluded from the blame (I'm not sure if you're including those originators in the "lenders" category?

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http://www.mortgageporter.com

morganb 11 months ago 1 point
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Rhonda, you are right I was thinking retail mortgage originators in the
"lenders" category but most people come to think "lenders" as the folks who
offered the big commissions to brokers, etc. So I will update w/Mortgage
Originators. Great suggestion.

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Don 11 months ago 1 point
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Ok, Morgan, I'm now bowing to your mortgage throne. This is f'n PRICELESS man!!!! I love it.

How this one, let's send it to Paulson suggesting he update the pyramid that is currently on the back of the Dollar Bill with this one. I think it would be QUITE APPROPRATE!!!

I was going to cut and paste and sending it out with full credits, but I'll wait for any redesigns!

THANK YOU!!!!

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morganb 11 months ago 1 point
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Thanks Don - I appreciate it! I'm not sure if the dollar deserves it! j/k

Feel free to distribute as you wish. Just finished with a couple of
touch-ups.

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FR3922 11 months ago 1 point
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Morgan,

Do you consider yourself part of this as a past owner of New Day Trust Mortgage?

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morganb 11 months ago 1 point
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absolutely. i tried to do the right thing, part of the reason i started
this blog - but i can't absolve myself of responsibility.

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Ann 11 months ago 1 point
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I love your pryamid..and yes..I too am listed on that chain.and like you Morgan I reaped the benefits of the good ole days but I can say that I sleep well at night knowing I did what was right, or advised my clients, who in the end..did what they wanted to anyway..that brings me to the point that you bring up in one simple word..GREED...

Most of the clients that I worked with are ok..but others are in trouble...why?..bad investment properties that were gobbled up when I told them not to buy(everybody wanted to be the next star of Flip This House), people who moved from nice modest homes, to grand McMansions(now I know how they got them...mostly with the toxic Neg Ams) and others who used one the equity in their main home to purchase additional properties for vacations..., they can't take, can't afford, or can't find a renter...but they were all motivated by GREED..more, more and more...

But all along the food chain..from these people..ridiculous amounts of money were made...by everybody...and now unfortunately...we are are going to give it all back...and then some..and as taxpayers, its going to hit us ALL in the wallet..

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morganb 11 months ago 1 point
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well put Ann, too true. I did an analysis of all the loans we ever made at
my company - I'll dig it up and repost. It was a huge percentage of 30-year
fixed loans, but I know there are some loans that in retrospect should
probably never have been made...

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Jim 11 months ago 1 point
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Morgan,
How about "stupidity"?

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morganb 11 months ago 1 point
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Jim - I like it :)

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Gayla 11 months ago 1 point
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Appraisers

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morganb 11 months ago 1 point
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Gayla - wow, great, great point. I must add them...

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Peggy 11 months ago 1 point
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I like the pyramid concept because it speaks volumes. I like having the government at the top with a "trickle down" image. It could just as easily be at the base showing the US government as the major force in this fiasco. ....historically, going back to the New Deal, and vociferously, US government intoning homeownership as an entitlement, not a privilege. In 2003, Congress mandated Fannie & Freddie achieve 70% homeownership. Both agencies and everyone in the mortgage business knew there wasn't a large enough pool of creditworthy buyers to achieve that!

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Don 11 months ago 1 point
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I'm sorry Peggy, I could not disagree more. It's not an entitlement to own a home, but Americans do have a RIGHT to access to homeownership. Most home loans before the New Deal were 5 year loans with a balloon payment. Fannie was set up to give people more access to homeownership, because homeownership across the board makes for a stable society. In the end, it provided access to homes after World War II and helped establish a huge middle-class. Yes, sometimes gov't does get it right, but it depends on the culture and people who run things. Unfortantely, we've been on a cultural run of almost three decades thinking more of the "me" and not of the "we". Examples, the junk bond scandal, the crash of '87, the S and L debacle, the tech bubble and now the real estate bubble. No enforcement of the laws on the books and no oversight by Congress has been disasterous.

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nick gogerty 11 months ago 1 point
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what about Moody's and S&P who rated the highly lucratie securities of mortgage related assets as AAA. There is a need for 2 other pyramids, responsibility and trust. Both failed. Greed is constant, negligence and irresponsibility are what ebbed.

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http://www.gogerty.com

morganb 11 months ago 1 point
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Great points nick - definitely need the ratings agencies in there.
appraisers and ratings agencies will go in asap.

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AaronP 11 months ago 1 point
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I would put appraisers in with RE agents, and I think the ratings agencies are probably included in with Wall Street.

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reuch9 11 months ago 1 point
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Got to get those appraisers on there somewhere...they had the power to stop it in its tracks.

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VacantHomes 11 months ago 1 point
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I agree that the credit rating agencies absolutely need to be in there, they were one of the lynchpins to the whole scheme. I'd say they deserve their own slice in the pyramid... I think they were probably a bigger factor than, say, Fannie & Freddie. (not that Fannie & Freddie were completely innocent)

Yeah, also add appraisers, but they could be grouped together with real estate agents.

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JohnW 11 months ago 1 point
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If you subtract refi mills from the pyramid, Real Estate Agents would be placed much higher than mortgage loan officers. Often during my past 20 years in the biz when telling a REALTOR that their client only qualifies for a $200k priced property their first response would be to find another loan agent willing to put a buyer in a higher loan amount. The REALTOR community does not care anything about the long term health of their buyer clients. To prove the point: ask any REALTOR to qualify their buyers as they are supposed to do. I doubt any more than 1 percent could actually pull it off. REALTORS take finance and ethics classes in order to get their licenses. It seems as though that data goes in one ear and out the other.

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John 11 months ago 1 point
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Nick Gogerty's comment that greed is constant ... responsibility and trust failed is right-on.

Starting at the bottom of the pyramid, homeowners trusted real estate agents and mortgage orginators to be responsible and tell them if they couldn't qualify for a lown. Mortgage originators trusted the lender's risk layering guidelines, because they were told the lenders have professional financial analysts and risk mitigators and they are not going to let unqualifed borrowers get loans. What 25 year old originator is going to disagree?

Greed is held in check by responsible and trustworthy authorities at all levels, and moving up the pyramid, the authorities became increasingly negligent.

Remember the proverb: The fish always stinks from the head downwards.

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http://www.assetbuilderloan.net

RB 11 months ago 1 point
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Power synonyms = "Authority" or "Influence"

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name 11 months ago 1 point
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forgot appraisers

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edd browne 11 months ago 1 point
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I would add appraisers and underwriters.
They can be considered part of lenders,
they are supposed to be "cops".

There is also a case to be made that
one category should be "Passive Citizens",
who don't feel obligation beyond family.
It's more than informed voting and ethics.
It should be raising alarms, agitation,
and sometimes the pain of litigation.

Credit agencies are part of the Wall Street Club,
but they should not be.

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paulemtg 11 months ago 1 point
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The greed went up up to the presidency? Please, the biggest factor an gains were mader by the selling CDO's and lying about the credit worthiness of the CDO's. Had Moody's and S&P been honest in the ratings none of this would have happend at the same scale. The collapse in equity was the result of foreclosed properties. Had any of the government agencies stepped in and frozen the rate resets, the sub prime contagion would have not had as negative effect on the capitalization of GSE's,CDO's, Banks, and yes the individual home owners. Most point to the negative affect this would have had on the secondary markets. The investors would not have lost as much had the real estate market been stabalized. Greed paid a part, but thats not the only reason, nor is it the only major reason. Its just a part of the problem. Whats happening to the home mortgage market happened in the commercial markets, maybe you don't remember.
Ignorance about history dooms those who don't heed the instruction to repeat the events with similar results.

Paul in Bellevue

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Fielding Mellish 11 months ago 1 point
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The problem with making every person in America "fess up" to having been part of the problem (as the pyramid essentially does) is that it's a little like saying "everyone's equally a lawbreaker - those who drive 56 in a 55mph zone and John Wayne Gacy who murdered 30+ young men & buried them under his house." If an originator never did Option ARMs, never lied about a borrower's stated income, never pressured an appraiser for an unrealistic valuation and never induced a borrower to take on more than they could realistically handle, then that originator should feel pretty darned good about themselves. Not having the foresight to see 30% property devaluations coming was an error common throughout the financial system, but it wasn't maleficent - in contrast to the many scum-sucking bottom feeders, who after years of suckering people into 1% Option ARMs, now look at your pyramid and conclude that they're no worse than anyone else, which is utterly untrue.

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Cindy S 11 months ago 1 point
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I don't see homebuilders specifically listed there but they should be. As builders they were able to influence appraisers to inflate prices. I don't even live in a real big bubble area and I read two articles quoting two appraisers in my area quoting appraisers saying this was going on. This was not a free market or demand, this was artificial price inflation and some say fraud.

Then, many builders opened their own lending arms, I guess they'd fall into your Lender/Originator category then. They got in on toxic loans, predatory and at times fraudulent lending, etc. Including heavy use of questionable "down payment assistance programs" (DPA's) that the IRS called a scam, HUD tried to shut down, and that some have compared to money laundering. Builders are one of the biggest users of DPA's.

I think the builders have kind of slipped under a lot of people's radars because most of us have this image of builders being just regular guys who are good with their hands, trying to make a living. In reality many building co's are run not by this type but by CEO types. Anything to make a profit.

This industry spends millions annually to change laws and get what they want. It threatened to withdraw congressional campaign donations if it didn't get what it wanted this year. Funding restored a few months later, and it has a bailout bill in progress, labeled as being for homeowners of course.

Shoddy construction is bad enough. Add funny lending to it and I am surpised more have not mentioned builders as being part of this problem. Perhaps it's because many of the co's can afford to pay millions in fines to HUD without admitting wrong-doing.

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Mike Sweeney 11 months ago 1 point
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Hey Morgan-

Great pyramid, that really sums it up. You could also add title companies and credit bureaus. And local lender associations who turned a blind eye. Maybe even state and fed agencies that failed to enforce the laws (specifically RESPA and FTC false/misleading advertising).

That pyramid keeps growing!

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Jeff P. 11 months ago 1 point
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Instead of power how about "influence"?

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Teri 11 months ago 1 point
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Another word might be influence. And yet another might be culpability.

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jbinfrisco 11 months ago 1 point
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Morgan,

Thanks for changing the word broker to originator. It's a subtle difference but more accurate. All originators, both banker and broker, must shoulder the burden when discussing their role in the mortgage crisis.

The banks like to intimate to consumers and the media that they are 'less' to blame. Not true. Keep up the good work.

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