“On the application, you don’t put down a job; you don’t show income; you don’t show assets, but you still got a nod. If you had some old bag lady walking down the street and she had a decent credit score, she got a loan - You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it. That was crazy, but the banks put programs together to make those kinds of loans. The bigwigs of the corporations knew this, but they figured we’re going to make billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of here, maybe even overseas.” – James Theckston, former regional vice president for Chase Home Finance in southern Florida.

For the better part of a decade, this is how business was done with banks and mortgage companies. If you had a heartbeat, you could “own” a home. No questions asked.

When everything fell apart, blame was tossed in many directions – though the brunt of it seemed to fall on the shoulders of those being foreclosed on: people accused of buying more than what they could afford, while taking out irresponsible loans.

Now, James Theckson is coming clean and helping to dispel some of those myths by calling out his former contemporaries. As Nic Kristof noted in the New York Times last week, the former Chase regional VP is now acknowledging that he and other bankers are mostly responsible for the country’s housing mess.

Granted, he’s a “former” VP with Chase, so you have to take his newfound wisdom with a grain of salt, but it supports an argument I’ve been making since the start of the real estate crisis and ensuing mortgage meltdown – low-income families becoming homeowners are not the cause of the meltdown.

A component? Sure, but not the cause.

There is no doubt that the blame can be spread around. People at every income level over-extended themselves and bought more than they could afford.

Now that the bubble has burst, I assure you the home with a mortgage of $1 million that’s only worth $350k, is far more damaging to banks (and economy in general), than the home that was worth $50k and is now only worth $25k.

The real problem, however, was the creation of the bubble.

As prices skyrocketed, people who didn’t want to overextend themselves ended up doing it out of necessity. In various parts of the country, waiting for something “affordable” wasn’t an option. People knew they were spending more than they could afford, but if they didn’t move forward, they’d lose out and end up having to pay more on the next offer, as prices continued to climb.

Making matters worse were aggressive mortgage brokers and representatives advising people that the home was an investment, so it would be ok to extend themselves now because they’d make it back as the value increased. Even if it meant doing an interest only loan, it was ok, you could refinance in a couple years and start paying down the principle then. “No problem!”

I can only imagine how many people heard “no problem” from a mortgage rep between 2000 and 2007.

On the other end of the income spectrum, low-income families were being told the dream of owning their own home was now a reality. With the promise of no money down combined with mortgage payments that were less than a rental payment, the idea of homeownership seemed too good to walk away from.

Unfortunately, few states required that mortgage reps be licensed, so it was very easy to sell someone - rich or poor - on something the mortgage rep knew wasn’t good, or safe: to tell them “no problem” when in fact, they knew down the road there would be big problems. There were, quite simply, very few repercussions for those peddling the loans irresponsibly.

Yes, personal responsibility says people should read the fine print, but reading doesn’t necessarily mean understanding. Regardless of education level, most are clueless when it comes to mortgages and it can be reasoned that you should be able to at least moderately trust the guidance of your mortgage rep.

So while there is no doubt that borrowers made mistakes that contributed to the mess we’re in, our friend from Chase expands on the much larger problem – the banks.

In the NYT article, Kristof writes: “One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.”

The truth is, it wasn’t only the less educated who were less savvy. People in just about every tax bracket were taken advantage of and in turn, the foreclosure epidemic has affected everyone.
The question I’m often asked is, how were the banks were able to dump as much money as they did into the mortgage markets, allowing more people than ever to qualify for a mortgage? How was that much money all of a sudden available to – seemingly – virtually anyone? Where did it come from? I’ve heard many theories, but one of the more interesting theories goes like this:

After 9/11, the Federal Reserve infused the nations largest banks with cash to prevent the financial markets from collapsing under the weight of the terrorist attacks.

When the markets remained (relatively) stable, the lenders held on to the money, used it to sell mortgages to anyone who could fill out a form, paid back the Fed thanks to skyrocketing property values – often based on shady appraisals – and let business boom.

No doc loans. No interest loans. You name it. Say what you want about the borrowers, but they didn’t invent the ridiculous programs they were sold. The banks did and – as the article points out – they were pushed heavily from the top down.

To make matters worse, people were encouraged to use their homes as ATM’s by refinancing into even sketchier mortgage programs, stripping all equity from the home and ensuring that prices would tumble with even the slightest hint of a recession. Which is exactly what has happened.

Since then, the larger banks have weathered the storm; while homeowners have seen their life savings evaporate to nothing. To add insult to injury, the very people who often talked borrowers into the higher purchase or sketchy refinance, are now the one’s lecturing those underwater on moral responsibility regarding their mortgage-related obligations.

That is, until now.

Kudos to Mr. Theckston for admitting the role he and his contemporaries played in helping to create this mess – hopefully, this is a beginning of a trend. It might not help the hundreds of thousands of borrowers who have lost their homes and savings to date, but it will eventually help hold those truly responsible for this mess accountable… the banks.