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The common people often speak negatively about the financial world and its role in the credit crisis, much of which is accurate criticism.

But the crisis was also caused by greedy and/or stupid house buyers who took loans they couldn't afford (often by straight up lying to the banks), and then, when they started defaulting on their loans and house prices started falling, the bubble burst for everyone. Indeed, this is the primary cause of the crisis: that the borrowers were not credit worthy (hence the credit crisis). While the banks should rightfully be blamed for not ensuring that they were credit worthy, surely the borrowers should get an equal amount of blame for likewise not ensuring that they were credit worthy?

So why hasn't this part of the population, the borrowers, gotten as much slack for the credit crisis as the financial world? They both seem to have been complicit in this selfish rigmarole.

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    Hi and welcome. Please take a minute for the tour. I think you should better tie this to politics; none of the actors mentioned are governments. Also I'm unfamiliar with a definition of "slack" that means blame. – user9389 Mar 14 '18 at 20:21
  • @notstoreboughtdirt - while this is true, I have heard on multiple occasions politicians blaming only the financial institutions, but never the borrowers. I will try to provide an answer that also includes the politics factor. – Alexei Mar 14 '18 at 21:22
  • I would say that home buyers are culpable for the 2008 financial collapse to a degree, but not to the extent you're describing in your question. Most of the responsibility lies on the shoulders of the banks and the US government. The banks for engaging in predatory lending practices. The government for threatening to penalize banks who didn't lend in low-income neighborhoods (look into the Community Reinvestment Act). – Michael_B Mar 15 '18 at 0:04
  • "often by straight up lying to the banks" Citation needed. I would say it was far more common for mortgage brokers to lie than it was for the house buyers themselves. And more common still for loans to be given overly aggressively based on what truth they provided. – Brythan Mar 15 '18 at 2:57
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    I voted to re-open because this kind of question fits under "conflicting egos" in our "What topics can I ask about here?" page. It's asking why one group is blamed more for another group, which is decidedly political. However, based on the same help page, an answer should cite "polls, punditry, or other verifiable and reproducible sources." – indigochild Mar 15 '18 at 13:45
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I'm presuming, based on your asking this 10 years later, that you must be young. So allow me to give you two down to earth anecdotes from the hey days that preceded it.

In 2005 a Californian friend of mine, who was broke and unemployed for all practical intents, was dead set about buying a crack shack for $100k-ish, thinking it was a good deal on the basis that the value could only go up. Even after a whole evening of explaining to her that we were in the midst of a bubble that would inevitably pop, she proceeded forward.

As to so-called Mac Mansion buyers, I had a number of clients at the time who were low- to mid-middle class home owners. They owned not one but several homes - sometimes well over a dozen. They were speculators, plain and simple. These were educated buyers with a good revenue. And it never even crossed their mind at the time that they wouldn't be able to repay the loans on those properties. They'd assume they'd simply sell at a higher value.

Point is, you can't put this dynamic out of context. The culprits proper weren't the home buyers, who had ample signals that all was well. Nor were the culprits, to a large extent, those who were issuing the loans without adequate documentation on e.g. revenue or assets, even though there is ample evidence that such fraud did occur on a large scale.

The real problem was securitization of loans: as a broker you'd issue a loan, and immediately sell it off to some investment bank, who would then bundle these loans and repackage them with a CDS (credit default swap, which is a form of insurance in all but name), which ended up graded as investment worthy and then sold to dumb money aka your retirement fund or banks reserves.

Put another way the real problem wasn't the loan takers. It was the loan sellers to a degree. Much more importantly it was the loan repackagers and the loan insurers, who collected commissions in the process and, somehow, got bailed out instead of going to jail.

As to the home owners in question, they absolutely did not get that much slack in practice. Quite a few went in foreclosure and lost everything, literally.

  • Though I must point out that your friend was quite probably correct, at least in the long term. And of course depending on local market conditions. Locally, average selling price topped out at $320K in June '07, hit a low of $145K in '11, and is now at $370K. So those of us who bought back then, lived in the house, and could keep up the payments have done quite well. It's the people who were relying on "leverage" who found themselves in trouble when the lever slipped :-) – jamesqf Mar 14 '18 at 22:56
  • Why should loan repackagers and insurers go to jail? – immibis Mar 15 '18 at 8:54
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    @immibis: Because they knew they were selling trash, to the tune of paying billions in settlement after the crisis. – Denis de Bernardy Mar 15 '18 at 9:02
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    I think your last point should be slightly expanded upon. "Why aren't homeowners blamed more?" Well because a lot of them lost everything and had to restart their financial lives, whereas a lot of the financial institutions seemed to get away relatively scot-free - the institutions who screwed up were bailed out, while homeowners who screwed up were left to sort themselves out. – Philbo Mar 15 '18 at 11:45
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    +1 to "Quite a few went in foreclosure and lost everything, literally.". People wouldn't be pissed off if all bankers involved were sent to jail and forced to repay for their decisions. Instead the government bailed them out and they got away scot free. – JonathanReez Mar 15 '18 at 15:57
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Note: I will try to provide a more Eastern-European perspective on the matter. It happened that the crisis caught me working on financial service software and I have some first-hand experience on how it worked from "inside"

tl;dr

Because financial institution are much more aware of the risks involved by credits and a regular person expects from them to know what they are doing (e.g. better estimation of the risk).

I know a specific case when the borrower could be blamed (this can be included in "straight up lying to the banks" in the comments): he and his wife took two loans in the same day, knowing that the debt checking system was not working real-time (required 1-2 working days), but these are more of an exception, at least where I live.

Long story

I will try to justify why is it so hard to blame the consumer.

1. Know how - most financial institutions have clear flows starting from the first offer and ending with the contract closure that use risk assessment, scoring algorithms and so on. Also, "maker-checker" principle ensures that mistakes for computations are minimal.

2. Lack of know how - this works with first point. The vast majority of consumers simply lacked (and still does) basic financial and juridic knowledge. The lack is so great that they even do not know that ("unconscious incompetence"). No regular school taught about these and there was no official campaigns to raise the knowledge (now, the banks and some organizations have such campaigns).

While many people know to go to a service to have a second-hand car checked before buying it, almost nobody thinks about going to a financial consultant and/or lawyer to ask for assistance when taking a 30-year loan.

3. Aggressive sales - all financial institutions were very sales-oriented disregarding any common-sense rules such as "try to take a loan in the currency you have the income in" or "what happens if the variable interest goes to the maximum historical value - can you still pay the installment"? I saw scoring algorithms allowing debt ratio up to 100% for private individuals.

3. Complex financial information - back in 2007 a typical repayment plan could have as much as 20 columns (various taxes, insurance some expressed in local currency, others in contract's currency etc.) making it hard to understand even for software developers, not to mention the actual client.

4. Complex juridical information - the contracts included lots and lots of clauses that were very hard to understand. Many of these clauses were declare illegal after the crisis ("abusive clauses").

5. Inflexibility - most of the financial institutions did not allow to have the contract studied before signing it (you could just read it for a few minutes at their office). Don't like a clause? No problem, we have plenty of customers waiting to buy a credit.

6. Cultural bias - the country I live happens to have the highest home ownership rate. So there is a deep culture bias towards "the right to own a house". It is very hard to beat that and one expects the authorities (and banks) to better regulate house credits (as they are currently doing, having learnt the crisis lesson).

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    A very similar pattern happened in Spain. – SJuan76 Mar 15 '18 at 10:08
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Mostly for two reasons:

  1. House borrowers were small fry with no resources, in large part.

    So blaming them wouldn't be productive, as you can't punish them effectively, either in punitive sense OR in restorative sense (maybe undefaultable financial penalty? not sure that'd work or be legal).

    Banks however, are big fish who can be financially punished, have money taken from, and slapped with legal rules.

  2. People typically tend to dislike large fish over small fry.

    "Hidden Brain" podcast had a recent episode on "Envy", where they covered research showing that people tend to dislike those "too far up" - so the bankers are far likelier to raise someone's ire than loan takers. Even if the banker was forced into this by "you must serve underserved areas" government rules (Community Reinvestment Act).

  3. Speculatively, politics likely played an interesting role (this is my personal impression, not backed up by any specific research).

    The people who most tended to be upset about the crisis were even more likely politically to be against banks than borrowers, being more left leaning. The right leaning people tended to concentrate their ire on the government over bailouts (which is where Tea Party movement started originally), so were more invested into that angle. This somewhat skewed the blame over the crisis towards the bankers: the left went after bankers as expected; the right after the government, nobody really was invested in going after borrowers since that'd usually be the job of "individual responsibility" emphasizing right wing who chose other priorities.

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    I'm not sure there would be any point in hitting people with no money with an undefaultable financial penalty. You may as well be sending them to debtor's prison. – immibis Mar 15 '18 at 8:54
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    In Spain mortgages are to be paid in full(if the sale of the property does not cover the pending loan the borrower must pay the difference) and there is no personal bankruptcy. The result was that -in a way not too different to what happened in the USA with the secondary market- in the books all of the mortgages were profitable (sooner or later the borrower would pay), so the banks sold wildly unaffordable mortgages. When the crisis stuck they "discovered" that you cannot squeeze money out of someone who does not have it, and many banks got in trouble but the directives had got their bonus. – SJuan76 Mar 15 '18 at 10:02
  • @immibis - moral hazard. The point of "debtor's prison", or any such consequence, isn't only or even mainly to get money from them, it's to prevent the next set of people from lying to get loans they shouldn't have been getting (and leaving me, the taxpayer, to pick up the costs when the dust settles). Otherwise, you have a moral hazard risk – user4012 Mar 15 '18 at 12:34
  • @user4012 I'll also point out there is no such thing as an undefaultable financial penalty. As SJuan76 put it "you cannot squeeze money out of someone who does not have it". So your options are - let them not pay and call it some other word than "default" - or squeeze something else out of them instead (such as labour). – immibis Mar 15 '18 at 20:23
  • With regards to debtor's prison for house borrowers - punishing people who might not have realised they were doing anything wrong, to send a message to future people so they realise it's wrong, is pretty immoral. I'm sure some people were doing it on purpose, but most of them probably just wanted a house and had no other way to get it. – immibis Mar 15 '18 at 20:25
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Two reasons:

First, bank are a bigger target, and are traditionally seen as "the enemy" anyway, so it's easier to keep the finger pointed where it's already pointing.

Second, the bank is telling me "Oh, yes, that house is a good investment and we are sure you can repay it off, or sell soon for some easy gain". Me, as a borrower, I trust the bank judgement 'cause it's their job and they are supposed to know what they are doing and talking about.


Just to add...

I have a friend who worked in an italian bank for a while, and the orders he had were "approve everything". During the bubble, managers of many involved banks got as much cash as possible, and then fled leaving the banks in huge troubles. Easy peasy.

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