Is everybody to blame for the Great Recession?

Dean Starkman says, "NO".  The primary cause was the mortgage industry. Sure, some of the average Joes who took out a mortgage did commit fraud. But Starkman looks at the numbers and demonstrates fairly convincingly that there were a small number of cheating average Joes. 

New Century, one of the prime lenders, reported that borrowers had failed to make even the first payment on 2.5% of its loans. The Treasury Department reported that so-called “suspicious activity” reported by banks peaked at 137,000 incidents in 2006. But even if every single one of those reports represents actual borrower fraud, that’s still only about 1% of the 14 million mortgages made that year. The FBI put total fraudulent mortgages during the peak boom year of 2006 at more than $25 billion. Compare that dollar value to the write-downs of $2.7 trillion of mortgages for that year.

Starkman argues that if one believes the average Joe bears major responsibility for the crash, then one assumes that everyone is to blame. If we are all to blame, this may be why so little has been done to punish the transgressors. 

But Sparkman disputes the notion that people knowingly took out bigger, riskier loans than they could afford—and that they all decided to do it rather suddenly around 2004. One story making the rounds is that people bought houses for investment rather than as a residence. Yet, the numbers show at most 15% of these cases.

The industry appraised properties. Yet, groups of appraisers collected 11,000 signatures asserting they were being pressured by lenders to inflate values of appraisals. The lenders decided the loan-to-value ratio which is a key determinant in lending. Mortgage brokers forged borrowers’ signatures and altered documents. Citigroup alone settled with the FTC a case alleging sales deception that involved two million clients in a single year. 

In 2006  more than half the subprime loans issued went to borrowers who had credit scores “high enough to often qualify for conventional loans with far better terms.” This was repeated often during the period.

Starkman makes a strong case and also tells us how come companies tried to motivate their employees.

Did you know, for instance, that WMC Mortgage Corporation, owned by General Electric, hired former strippers and an ex-porn actress to entice brokers into selling their mortgages, according to a report by the Center for Public Integrity? Or that Wells Fargo gave its mortgage stars all-expense-paid vacations to Cancun and the Bahamas and treated them to private performances by Aerosmith, the Eagles, and Elton John? Or that New Century sent top loan sales reps to Porsche driving school?