>a lot of people taking out mortgages with either blatantly or coerced false income information
Money flowed freely b/c the mortgages didn't matter. It was the ability to bundle the mortgages and leverage them that fueled low-standards and drove much of the lending frenzy.
>The subprime crisis was precipitated by a lot of people taking out mortgages...these people were no longer able to make their mortgage payments
No. Again, mortgage debt alone was a mere fraction of the problem. Those loans were levered up many multiples through CDOs and other exotic instruments, which was the real problem.
In 2008 there was a lot of effort made to blame poor people/subprime debtors. But, it's been covered ad nauseam since then, so it's kind of surprising to hear someone still making those claims in 2019.
The derivatives were created and rated on the assumption that the borrower's default rates were consistent with historical default rates. Of course that was not the case, and losses became multiples higher, and blew up derivatives that were highly levered. However, derivatives didn't cause the losses, borrowers defaulted!
Well, sure, we can play the chicken-and-egg game and posit that if they'd never defaulted, the house of cards would've remained standing.
But, that's the not the predominant issue for many reasons, some of which are embedded directly in your statements. For example:
>rated on the assumption that the borrower's default rates were consistent with historical default rates
Why would they be rated as such if the viability of the underlying mortgages was not, in aggregate, consistent with those that produced the historical rates?
That alone tells the story.
The derivatives drove the outsized lending which ballooned the number of riskier subprime mortgages in the first place. Then, the many layers of leverage just exacerbated the problem.
At the end of the day, increases in subprime loan defaults could have been weathered. The derivatives were responsible for turning a containable downturn into a full-blown crisis.
You're saying the same thing. If the underlying lone is precipitated by blatantly or coerced false income information then that was the problem. CDOs are simply derivatives that derived their value from those miss rated loans. So yes it was poor people, but it was also the people way to willing to give those people loans at rates way larger than they should of for financial instruments.
The people employed by the banks were complicit. It's that simple. If Jane Doe applies to buy a $1M home, and no one checks her credit and sees that she already has 3 other similar properties, whose fault is it? Passing the buck on due diligence is such a cop out. It's like a drug dealer justifying his actions; "Hey if I don't sell it to her, someone else will."
People who work in risk and compliance NEVER get promoted to the top because they are cost centers, and prevent other people in the company from getting that huge payoff.
Thats hard because you can easily blame that on consumer credit rating agencies like Equifax. Because their number doesn't weight length of credit repayment. So if you only have had any debt for 1-3 years you can have the same score as someone who has had debt for 10-30.
It was a cop out though. I think no one in the banks thought to challenge that. Now they do but previously they didn't
Money flowed freely b/c the mortgages didn't matter. It was the ability to bundle the mortgages and leverage them that fueled low-standards and drove much of the lending frenzy.
>The subprime crisis was precipitated by a lot of people taking out mortgages...these people were no longer able to make their mortgage payments
No. Again, mortgage debt alone was a mere fraction of the problem. Those loans were levered up many multiples through CDOs and other exotic instruments, which was the real problem.
In 2008 there was a lot of effort made to blame poor people/subprime debtors. But, it's been covered ad nauseam since then, so it's kind of surprising to hear someone still making those claims in 2019.