An essential part of the real estate bubble was mortgage securitization, the process by which mortgage loans were sold into investment trusts from which bonds were sold.
It was mortgage fraud from A to Z, from the selling of mortgage backed securities trusts, before the trusts were full of mortgages.
From the ratings agencies, assuming in their ratings that home prices would NEVER go down, that the historical default rate of 30 year fixed rate mortgages that were 80% loan-to-value was applicable to the new market of 125% loan to value, interest only, ARMs, 80-20 mortgages, and so on.
That was the big picture.
The micro was, mortgage companies evolved to only warehouse money.
They outsourced the vetting of home buyers to mortgage brokers, who got paid at closing, whether the loan was ever paid or instantly defaulted.
More often than not, they sold the mortgage within a month.
The brokers managed to find appraisers who always appraised the house at the value needed for the mortgage, or mortgages, to go through.
Investment advisers told people, you need to borrow more money, and buy more house, you are missing the boat, you can’t lose!
Lending standards disappeared with “no-doc” loans.
I have clients who sent in tax returns and pay stubs, but the broker ran it through the mortgage company as a no-doc loan, because he knew they would NOT qualify for a conventional mortgage.
People were encouraged to buy with nothing down, an artificially low teaser rate on an(adjustable rate mortgage).
Then, the two things happened that all the assumptions presumed would not: interest rates crept up, and home prices went down.
The government played an essential role, with Fannie and Freddie, buying or guaranteeing most mortgages in the USA.
When the government makes anything cheaper, demand goes up.
(see student loans)
The artificial demand bid housing prices up.
Then, when ARMs adjusted up, as the teaser rates expired, couples could no longer re-finance into another teaser rate ARM, and could not sell their house for enough to cover the mortgage balances.
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