Why The Housing Bubble Burst: Explaining Economic Homicide
Roy Oppenheim’s commentary was originally published on Yahoo! Homes and is being republished on South Florida Law Blog with their permission.
It is easy to call Wall Street a villain and lay the blame for the housing collapse at their doorstep, and I did just that in one of my recent blogs, where I likened the banks’ conduct during the housing collapse to “economic homicide.”
My Rabbi asked me to further explain the concept of foreseeability, a notion I touched on in the blog, as it relates back to the banks and the real estate bubble.
So allow me to explain, but first, please grant me a few more hyperboles.
If you pour gasoline on a fire, then you’d have to know that fire would accelerate. Otherwise people would think you are a fool.
Likewise as people often refer to the real estate market as a bubble, I like to think of the banks and their agents as people who filled that bubble with helium.
At some point they’d have to know it would burst. It was absolutely foreseeable. So how did they “fill the bubble?”
First, they completely disregarded underwriting guidelines. Bank of America, Wells Fargo, and most of the big banks took shortcuts, playing fast and loose with guidelines they once held sacred.
They signed off on these loans without considering their underwriting obligations, without checking whether the borrower was creditworthy, or even checking tax returns. More loans went out, and into the securitization machine, but of course the quality of those securitized trusts ended up resembling something your dog might leave behind on the sidewalk.
So now you have agencies like Fannie Mae and Freddie Mac, and a number of other investors, left holding the proverbial bag of lousy mortgages, and they have turned on the banks in record numbers. That’s why you have dozens of lawsuits now chugging their way down the judicial pipeline.
Second, the banks were puppet master to property appraisers, and as a result many of the appraisals performed during the days of the housing boom were bogus.
These mortgages used to be double and triple checked. But once the securitization engine took over, that didn’t happen. Loans were being passed off as AAA rated, when they were nothing more than fool’s gold.
Last, the banking industrial complex also decided to ignore the tax code and pretended these securitized trusts were in conformity with the law when they were not.
Now Fannie and Freddie and every agency involved with the housing market either didn’t know what was going on over on Wall Street or maybe they didn’t want to know. I suspect they had some inkling, but I doubt we will ever really know for sure. But either way, it was Wall Street that lit the match.
All of this enterprise conduct within all these various industries added even more fuel to the fire. All of these industries have culpability and responsibility for adding the fuel.
These types of conduct in my mind rise to the level of foreseeability Banks operated within their own sealed bubble, engaging in conduct that was systematic and organized, so of course the bubble was going to burst.
It is no different than BP turning a blind eye to the control valve that ultimately caused the Deepwater Horizon explosion, which is why I made that analogy in the first place.
But the banks didn’t just blow up a lone oil rig; they wrecked the whole economy and destroyed millions of families and for that they must be held accountable.