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Who Is Responsible for the Housing Collapse?

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None of the parties can be absolved.

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MINYANVILLE ORIGINAL The darkest days of the housing market's downward spiral may be behind us, but the battle over who should shoulder the blame is rambling on.

In Friday's Wall Street Journal, Nick Tamiraos cited a paper published by the Federal Reserve Banks of Boston and Atlanta that aims to dispel the popular notion that Wall Street, not Main Street warrants the harshest chiding for the financial crisis. Not everyone agrees with the Fed economists' viewpoint, including Madhaus over on Bay Area Real Estate Trends, who isn't convinced that we should let bankers off the hook just yet.

The Fed paper pooh-poohs the notion that we should heap blame on "industry insiders" like mortgage brokers and traders at Wall Street firms like Goldman Sachs (GS), Bear Stearns (JPM), Merrill Lynch (BAC), and Lehman Brothers (BCS) for duping the rest of us into believing that their securitization machine could ensure that the real estate party would last forever. Instead, they propose the "bubble theory" where the real culprit was borrowers' belief that home prices would never go down.

It is easy to see why the paper has sparked criticism from the populist camp. At a time when millions of homeowners still face the prospect of losing their home to foreclosure, piling on and blaming them for causing the crisis isn't a popular viewpoint. It isn't that far off, however: Borrowers are to blame for the crisis, since record levels of demand had to come from somewhere.

But implicating borrowers isn't the same as absolving bankers.

Each side played their role. Wall Street banks widened mortgage underwriting guidelines beyond rationality, opening the market for homes to borrowers that in hindsight had no business borrowing that much money. Mortgage brokers peddled the product, which was endorsed by rating agencies like Moody's (MCO) and Standard and Poors (MHP), while Realtors waived their pom-poms and promised home values would never go down. Borrowers, some by coercion and some by free will, took the bait -- hook, line, and sinker.

Cash poured into the market from abroad, fueling the bubble even as home prices began to wobble. In 2006, I sat in meetings and listened in awe to European bankers who had flown into New York with a single order from bank executives: Put money to work in the US housing market. They didn't understand what they were investing in, and didn't bother to learn. They just didn't want to be left out.

In the final analysis, any assessment of the housing market's collapse that does not implicate all parties, from borrowers to bankers to regulators to lawmakers, is incomplete. Commentators aiming to absolve certain parties are ignorant at best and engaged in willful deceit at worst.

Twitter: @schnageler
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