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Subprime loans (all a subprime loan is is a loan that doesn't have the best interest rate) were the murder weapon, but the murderers were the mortgage industry

by joshAg 8y ago

Subprime loans (all a subprime loan is is a loan that doesn't have the best interest rate) were the murder weapon, but the murderers were the mortgage industry approving those loans based on fraudulent data they created in order to push the loan through (eg certifying the data in the loan application was correct when they hadn't verified it or even when they had purposely lied in filling it out) and then various financial industries bundling those loans up into securities and then assessing them on that fraudulent data (knowing it was fraudulent since they were the ones who audited or were supposed to have audited it) and selling them to investors (ie pension funds, IRAs, 401ks, and institutional investors) as being much much less risky than they actually were.

mikestew 8y ago
Subprime loans (all a subprime loan is is a loan that doesn't have the best interest rate) That way over-simplifies, and misses a key point: the loans don't "have the best interest rate" because they are assessed to be loans at higher risk of default. The way you say, it sounds like the house buyers just didn't shop around enough for mortgages.
- joshAg 8y ago
  I left it off, because i don't think the higher assessed risk of default than prime loans is relevant for explaining that the true cause is the fraud and purposeful misstating of actual risk. The same thing could have happened with prime loans as well. Yeah, subprime loans are riskier than prime, but that doesn't matter when something is being repackaged as being less risky than it actually is. And even when we talk about why the loans defaulted, the issue isn't that the loans were subprime instead of prime and that that was due to a higher risk of default. It's that the loan was given based on falsified data to cover up reasons that should have prevented the loan from being given (almost always due to a debt:income ratio that was much too high), the borrower was advised by fiduciaries to take more than they should have given their income, and the preferred loan type was one where the the necessary payment ballooned massively after a set time period, which meant that when the payment when up the borrower would be unable to pay the higher payment because of how far they were stretched by the base payment, because the borrower was advised that they would be able to refinance at a lower rate due to an expected-by-their-fiduciary rise in equity.
  - mikestew 8y ago
    I left it off, because i don't think the higher assessed risk of default than prime loans is relevant for explaining that the true cause is the fraud and purposeful misstating of actual risk. So the already-risky loans were made more risky due to fraud and deceit on the part of loan writers. Fair enough, I have no argument with that as a major contributor, if not root cause.

by joshAg 8y ago

mikestew 8y ago

Subprime loans (all a subprime loan is is a loan that doesn't have the best interest rate) That way over-simplifies, and misses a key point: the loans don't "have the best interest rate" because they are assessed to be loans at higher risk of default. The way you say, it sounds like the house buyers just didn't shop around enough for mortgages.

joshAg 8y ago
I left it off, because i don't think the higher assessed risk of default than prime loans is relevant for explaining that the true cause is the fraud and purposeful misstating of actual risk. The same thing could have happened with prime loans as well. Yeah, subprime loans are riskier than prime, but that doesn't matter when something is being repackaged as being less risky than it actually is. And even when we talk about why the loans defaulted, the issue isn't that the loans were subprime instead of prime and that that was due to a higher risk of default. It's that the loan was given based on falsified data to cover up reasons that should have prevented the loan from being given (almost always due to a debt:income ratio that was much too high), the borrower was advised by fiduciaries to take more than they should have given their income, and the preferred loan type was one where the the necessary payment ballooned massively after a set time period, which meant that when the payment when up the borrower would be unable to pay the higher payment because of how far they were stretched by the base payment, because the borrower was advised that they would be able to refinance at a lower rate due to an expected-by-their-fiduciary rise in equity.
- mikestew 8y ago
  I left it off, because i don't think the higher assessed risk of default than prime loans is relevant for explaining that the true cause is the fraud and purposeful misstating of actual risk. So the already-risky loans were made more risky due to fraud and deceit on the part of loan writers. Fair enough, I have no argument with that as a major contributor, if not root cause.