http://gamingthecreditsystem.blogspot.com/2007/03/re-jlps-subprime-lender-mess-question.html

Jeremy is right. It’s both parties – lenders knew the risk of the sub-prime loan. Borrowers think that pleading ignorance will save their butts (and then sue when they find out it’s not a magical world we live in).

Plain and simple – if I *was* to purchase a $250,000 home (or a $60,000 home for that matter), I’d be doing a lot of homework on it unless I was paying it full, in my *own* cash.

I feel that both the lenders and the borrowers are reaping what they sowed. Both got greedy. Nobody made the lenders give out their money, nobody made the borrowers take it.

You couldn’t be more wrong. There are many instances where a borrow will have less than perfect credit, be in over their head with outgo, and borrow from a subprime lender to consolidate debt. I encounter them every day. To minimize their outgo, an ARM is often a good solution. It is a good solution PROVIDED THEY BUDGET THEIR INCOME AS I ADVISE. During the fixed period, they can increase their credit scores in order to qualify for a fixed rate mortgage when their ARM is due to adjust (again, if they follow my advice). The problem is that our society has people fixated on “keeping up with the Joneses” and living way beyond their means. Are there the occasional “situational expenses”? Sure, but they are few and far between. Far more people pay off all of their credit card debt only to max out their cards again within a year. The “increases in costs of living over time” are negligable; we’re talking about 2-3 years here typically. COL doesn’t increase that much in such a short period.

You wrote, “I have even heard of loan officers transfering large sums of money into borrower’s bank account for a few days to inflate their debt to income ratio when the banks check.”

If this is true, then yes, that is shady. I tend not to believe it though, because a borrower’s bank account balance doesn’t typically come into play with their DTI. And even if it did, lenders (at least the ones I deal with) will require the funds to be seasoned for up to 60 days.

Brokers and lenders do have responsibility to not write bad loans (MTA options…I have never sold a single one. There are only a FEW RARE cases in which one might be advised). However the borrower has far more responsibility to manage their own finances. We live in a society that is far too materialistic, and people constantly spend much more than they should. That is the problem; not lenders, and not brokers.

In the individual cases where a borrower has to default, it’s usually they’re problem for not being financially knowledgeable (discounting surprises like having to suddenly take care of 16 nieces and nephews or some such).

The larger problem however, that some see as potentially starting a recession, is with lenders going under; that’s entirely the lenders fault for not accounting for the amount of risk inherent in the loans they were giving out.

As far as where the blame goes, I think there’s enough to spread around to lenders, RE agents, (former) homeowners, and the institutional mortgage bundle buyers. And no one would have been caught had not the rates been raised at the same time as the job market remained relatively sluggish for the lower paid, and the RE bubble hadn’t burst.

Everyone knows someone, first hand or second hand, who can relate some questionable lending practices. Couple that with consumer pressure, greed on all sides, and you get a financial perfect storm.

As they say, you can’t tell who’s swimming nekid until the tide goes out.