At The Local Level …
Ultimately, with free-flowing credit, far too many mortgage loans were made to people who had no chance of paying them back unless market conditions remained the same for a long time. Market conditions changed, for the worse.
Far too many lenders were issuing adjustable rate mortgage loans with low teaser rates. Borrowers were told they could simply re-finance in the future at a lower rate – this assumed property values would continue increasing. Values dropped and credit tightened. These were bad loans to begin with – and the phrase ‘predatory lending’ was born.
Far too many borrowers were given mortgage loans with little to no underwriting. That is, no or bad credit was fine. Stated income, no problem. One of the drivers for this bad behavior on the part of the lenders was commissions being paid to the loan officers without regard to how solid the loan was. On top of these questionable practices, we had a congress that was pushing the industry to make affordable housing more readily available to anyone who could fog a mirror.
Individual Banks
Banks rely on volume to make money. They make a little money of each mortgage loan, and they make even money off a portfolio of mortgage loans. Buying and selling of portfolios was, and remains, common practice.
Federal Government Involvement
The federal government was not blameless. See these articles.
Meanwhile … On Wall Street
Portfolios were purchased and bundled together into bonds and bond funds. These were packaged into CDOs (Collateralized Debt Obligations) and on and on … with commissions being paid at each level. If you’re interested in more details, read the book “The Big Short” or see the movie.
Then there are the ratings companies: Standard and Poor, and Moody’s. They were giving AA and AAA ratings to the above bundles even if only a small percentage of the contents of the bundle was good. That is, bonds and CDOs that contained mostly bad loans were rated highly by both ratings companies simply because they had a percentage (not even a high percentage) of good loans in them.
Will this happen again? No. At least not the same way. Several things were put into place to prevent this sort of debacle. Between the Dodd Frank legislation and The SAFE Act, borrowers and lenders have some measure of protection. For instance, when creating a mortgage loan, the lender must be able to show that the borrower can afford payment (see title XIV, Subtitle A of Dodd Frank). The use of an RMLO to create the loan and a servicing company to service the loan are also huge factors that partialNotes.com considers when determining whether to create or purchase a mortgage note.
Recent legislation goes into effect on 1 May 2023 that stipulates a fee will be charged to people with good and great credit who are getting new mortgages. This fee will be redistributed to people with poor and fair credit to help enable them to purchase homes. The reader is left to decide for themselves whether this is a good idea, or whether we are re-creating an environment wherein home ownership is being granted rather than earned.