Everybody joins

The bubble grows

Giant fees for bad loans

Everybody joins
Fees from investors were a profit machine for firms selling securitized mortgages. Looking for more profit, more and more firms set up own departments to take over the whole process. On the safest home mortgages, they could not compete with government supported Fannie and Freddie so they choose other targets: loans too big for F&F and subprime loans. As long as they got their astronomical fees, not many doing business on Wall Street cared about fraud; be it by CRAs, by banks or by others.

Risky loans increase
The loans got bigger and the demands made on borrower got more lax. In 2000, 0% of subprime loans were interest only and 25% lacked proper documentation; in 2006 the corresponding figures were 22% and 44%.

Teasers, liar's loans
With the government vigorously backing housing loans, mortgage brokers and banks saw this as a chance to make big profits.
The methods were not always straightforward. The banks were misrepresenting, not telling the borrower about the dangers, blatantly lying. Tricking in a lot of ways.
The bank could offer "teasers", loans that at first required very low payments but that later were reset to much higher. "Liar's loans" were common. If the borrower gave his true income and it was too low to qualify him, he was told to write in a higher number. The broker could make the false entry, sometimes even without telling the borrower. If the borrower hesitated, he was told that if he got in trouble he could just get a new loan; he could not lose because the house value would always rise. The lenders even encourage second-lien equity loans, loans the borrowers could spend on other things. There were no holds barred, the lenders could even directly forbid the staff to verify borrower's income.
For tricking a borrower to take an expansive subprime loan when he qualified for a prime loan, a mortgage broker could get a multithousand-dollar bonus from the bank. A broker could give a quote for a fixed rate mortgage and then give the borrower an adjustable-rate, trusting that next to nobody examines the mortgage to see if they are getting what they were promised.
Many brokers were just interested in making a fast buck on the fees. The borrower could be someone wanting a house of his own, he could be someone investing in real estate; no matter if the broker downplayed the risks, misrepresented, lied or falsified the document, when the borrower signed he was stuck with the loan.

© Anders Floderus