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The banks and mortgage brokers making all those "liars loans" knew that the loans weren't going to be repaid, but they didn't give an effing eff. They knew that
by MaysonL 12y ago
The banks and mortgage brokers making all those "liars loans" knew that the loans weren't going to be repaid, but they didn't give an effing eff. They knew that they would be able to sell the mortgages in RMBSs and pay their loan officers and executives handsome bonuses for all those massive phony profits. They would blacklist appraiser who wouldn't give them appraisals to fit the loan they wanted to make.
- branchless 12y agoSpot on. Other responses are naive. They speak of "the banks". There are two entities here: 1. companies 2. individuals working for companies who get commission for selling loans whether they get paid or not Plus there are many many other problems with banking other than sub-prime which boil down to the above. That's why we need to start putting individuals in jail.
- JackFr 12y agoThis is ludicrous and ill informed. To put someone in jail, typically they need to commit a crime. If someone lies about their income, and borrows money based on that information, the borrower has committed fraud, not the lender. I'll grant that it is immoral to steer someone into a loan which they probably won't be able to repay. However, unless the lender's agent materially misrepresented the loan, it is not illegal. The originate-to-sell model does introduce perverse incentives on the part of the lender's agent -- prudence takes a back seat when you don't hold the note. But if a borrower lies, and the lender's agent willfully ignores the lie and then sells the loan, both the agent and the borrower have defrauded the buyer of the loan, and it is that investor who is the victim of the fraud. No one was making borrowers take out loans. The reason why no one is going to jail, is because no one is wants to talk about 1) the culpability of the borrowers; and 2) the trillions of dollars of lost wealth did not flow into Wall Street bonuses, rather it went into loans to the public which were not repaid.
- collyw 12y agoIs it not part of the banks responsibility to be checking that these loans can realistically be repaid? Would you lend a large amount of money to someone without a job and expect to see it all back?
- JackFr 12y agoIt is their responsibility -- their responsibility to their shareholders. However, unlike an unsecured line like a credit card, the claim on the property that a mortgage entails, makes the more likely to be repaid even in the event of a default. In the industry, the terms 'subprime' was often used interchangeably with 'home equity'. 'Home equity' was used not in the sense of the consumer borrowing 'Home Equity Lone of Credit', but rather that the basis of the loan was not the borrowers ability to pay, but rather the value of the home. This made sense in an environment of rising home prices. No one defaults when they can just sell to get out of the loan. That was the realistic basis for the loan being repaid. (However in an environment of stagnant prices it fell apart.)
- AnthonyMouse 12y ago> The banks and mortgage brokers making all those "liars loans" knew that the loans weren't going to be repaid, but they didn't give an effing eff. They knew that they would be able to sell the mortgages in RMBSs and pay their loan officers and executives handsome bonuses for all those massive phony profits. They would blacklist appraiser who wouldn't give them appraisals to fit the loan they wanted to make. The problem that created the problem was still that people were investing in mortgages rather than companies doing R&D. You can't sell bad mortgages to investors who don't buy mortgages.
- JackFr 12y agoI'm sure you can find enough anecdata of predatory lenders to get your dudgeon up, but the reality is that they were a cause of the crisis only at the far margins. Th bulk of the crisis was caused by banks and borrowers making foolish decisions in good faith. The crisis, like virtually all financial crises, was caused by leverage. Home buyers want it (they'd rather put 3% down than 20%); home lenders should be averse to it. The combination of the originate-to-sell model along with asset-backed security structures which were intended to de-lever the loans to make them palatable to investors had consequences which should have been foreseeable, but which were not. People (and bankers) did not somehow become more greedy, more evil and more shortsighted in the lead up to the crisis.
- bsder 12y ago> People (and bankers) did not somehow become more greedy, more evil and more shortsighted in the lead up to the crisis. Actually, by most accounts, they did. The problem was that when 90+% of your financial colleagues are betting that the market will go a certain way, it doesn't pay to fight that. That self-reinforces and things get worse and worse. Look at the game theory: 1) I'm right about the economy going bust and the economy is about to collapse. Well, I can protect myself (a bit), but my company is going to collapse if the economy goes off a cliff and I'm out a job. 2) I'm wrong about the economy going bust and the economy is not about to collapse. Well, I'm still out a job. 3) I'm wrong about the economy going gangbusters and it goes haywire, I'm laid off along with everybody else. 4) I'm right about the economy going gangbusters and it goes gangbusters, "Yay! We're all rich. Where's the hookers and blow?" I only have one good outcome--drink the Kool-Aid and pray I can get out before it all goes bust.