Almost two years ago, I became interested in the housing bubble and the bizarre mortgages being offered to support it. I’ve been convinced for almost that long that the current mortgage crisis was coming.
Since the shit did indeed start hitting the fan, I’ve asked myself numerous times: if someone like me with a minimal knowledge of economics and no real stake in investments could see this coming, why did professionals in banks, mortgage companies, and investment companies run headlong off this cliff?
The only answer I can come up with is that it’s plain ol’ greed. Either they were making so much money at the time that they deluded themselves that it would continue, or they cynically hoped to make theirs and get out before the crash. Either way, it’s not a very comforting answer. We see this cycle repeated with every new generation (or more frequently): the savings and loan crisis, junk bonds, etc.
My friend Rafe Colburn alludes to this in a new blog post:
Why were banks so eager to sign people up for such incredibly risky mortgages?
The reason is that they had already originated as many good mortgages as they could, and there was still more demand for mortgage backed securities. So mortgage brokers had to find more mortgages to sell, and the easiest way to do it was to loan money to people who really shouldnâ€™t be buying a house, or to convince people to upgrade into larger houses that they couldnâ€™t afford by offering them low monthly payments.
So when you search for the source of the crisis, look in the direction of the big investors who were willing to buy up any old mortgage backed security, no matter what its risk profile was. Those people put billions and billions of dollars on the line, and funded an avalanche of loans sold to the confused, the ignorant, the overly optimistic, and the dishonest.