While the notion of Wall Street as the big, bad subprime mortgage vacuum gained steam in Congressional hearings and the popular press last week, some CDO managers say that they, along with other home equity loan buyers, are just as much a victim of irresponsible subprime lending as the little old lady pursued by the big bad wolf, er, mortgage broker.
They contend that liquidity providers - whether it be a mortgage loan underwriter, warehouse lender or CDO manager - are, in many cases, being unfairly blamed as the reason behind mounting delinquencies and foreclosures within the subprime lending industry.
"I think what you are going to see are advocates increasingly pointing the finger further up the food chain than the rogue mortgage broker in the inner city," said Matthew Lee, executive director of the New York-based advocacy group Inner City Press/Fair Finance Watch.
Assuming that a fair chunk of the early payment defaults that have pushed a number of mortgage lenders into insolvency and sullied Wall Street balance sheets can be partially explained by borrower fraud, subprime loan buyers say they should not shoulder all the responsibility simply because they provided funding.
Borrowers should be held equally accountable for actions such as fudging their income on stated or limited documentation mortgages, some sources said last week.
"If you go out and create a rigged or fraudulent transaction, you are going to go to jail, but if you fraudulently misrepresent yourself, there is no consequence - right now you are an aggrieved party," said Louis Lucido, group managing director in Trust Company of the West's credit mortgage group.
"If regulators are going to do something, there should be a cause and effect on both sides of the ledger."
Some states and municipalities, not to mention federal agencies, are kicking around plans to help subprime borrowers who are in jeopardy of losing their homes. Ohio, for one, announced last week that it would issue $100 million in municipal bonds as part of a plan to offer fixed-rate mortgages for an estimated 1,000 borrowers in danger of foreclosure.
"I don't think any of them deserve to be helped. I think there's been enough regulation to make sure the typical homeowner knows what they're getting into," a CDO asset manager said.
Others point out that while securities investors may not have been the ones over-inflating incomes on mortgage applications, they should have exercised restraint in buying mortgages that allowed borrowers to do so.
According to one trader, subprime loan buyers should have known better.
"Sure, a handful of people might be telling the truth - like waiters who don't document their income," the trader said. "But, realistically, this is not the norm. People wanted to live in a bigger, better house with more optionality, so they paid a little extra interest and got over-levered. If CDO managers are surprised, then they've been smoking crack for the last three years."
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