4 ms·
It does explain it. They were long because they thought the housing market could never crash. It doesn't really matter how bad someone's credit is, if the value
by mattmaroon 11y ago
It does explain it. They were long because they thought the housing market could never crash. It doesn't really matter how bad someone's credit is, if the value of homes keeps going up the banks will not lose money. They might put nothing down and then pay their mortgage for 5 years, then default, but the home's gone up 15 or 20% in value so the bank will resell it and be made whole.
- mmsmatt 11y agoFor a longer (and fairly technical) answer, see "Slapped by the Invisible Hand". Essentially, a subprime mortgage had the price-will-rise-forever view baked in, as a way for the borrower to passively increase equity in the house while making very low payments. When the prices stopped rising, these borrowers went underwater fast and could not refinance when they needed to.