Tuesday, December 25, 2007

Subprime Lending Placing the Blame

By Sean Anderson

A lot of CEO's, CFO's and whole companies have been blamed for being a part of the sub prime lending problem. People have had their homes foreclosed upon by banks and the market has suffered as whole. The real culprit of the sub prime problem has skated by un-blamed and has not suffered any consequences. Who should be sharing in the suffering? Well it should be the two bond rating companies Moody and Fitch. They pass judgement on the quality of bonds and they gave the bundled sub prime mortgages a much higher rating than they deserved.

This in turn caused pressure to be placed on investing groups to seek the higher returns being offered by bonds that were perceived to have a lower level of risk due to Moody's and Fitch. The criteria for making decisions was flawed and so became the market. Mortgage lenders kept writing sub prime loans, because they were seen as good investments by funds and financial investors like CitiGroup.

The good ratings given by Moody's and Fitch sent a signal to sub prime lenders that the fraudulent activity of writing and packaging mortgages to undeserving lenders was acceptable. Moody's and Fitch provided the environment to make this possible. This does not mean that banks did not consciously ignore sound lending practices in making decisions. It does not take a lot of skill to see whether someone will be able to barely make the mortgage payment. If they are working overtime and decide to stop it is easy to tell they won't be able to make they payment. It is easy to tell that given the conditions of the loan are based as an ARM when the interest goes up and the payment becomes three-hundred or more per month that the borrower is not going to be able to make the payment.

At the end of the day everyone could have used better judgement. Moody and Fitch put into place ratings that disguised this practice. They covered up the problem and the ratings caused investor to gravitate toward a problem. They set the trap and now we're caught.

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