RE: Who Should We Find Responsible For The Subprime Mortgage Lending Crisis?
The subprime crisis was not because banks couldn't collect money on mortgages. It was because mortgage derivatives were overrated by rating companies and risk was not properly evaluated. So there would be several layers of derivatives where investors were tremendously exposed to low grade debt that was certified as high grade.
It is similar to walking into a casino and being told your odds of winning are 99 of 100, but in reality they are 1 of 100, and much of the economy is predicated on the accuracy of the risk estimates, which were not only wrong but generally lies.
To even bring the borrower into the equation completely absolves everyone who sold or certified derivatives that they knew were toxic.
The narrative that brings this question into our consciousness is part of a larger theme that attempts to blame low income people for society's problems.
When writing the article I was debating going in deeper on the poor performance of the rating agencies, especially with regards to how they vastly underrated the amount of risk that traunched mortgage products had. However I figured that the base of the problem was what I would address, which was that ultimately subprime mortgages were being offered in high numbers. Youre right that if the mortgage products were properly rated, we would have seen a far less amount of investment into them, but at the time the speculation on the housing bubble never crashing was so crazy, that people were okay with defaults because they figured the price of the house was always going to keep going up.