posted by dsk on October 9th, 2008 at 9:56AM
>Housing prices were rising, which makes subprime mortgages essentially a non-risk
Oh come on. I'm 100% sure Banks didn't think this way. These Banks that were in business for decades through many market cycles. These Banks also issued mortgages that would last decades. It is a huge risk to believe that house prices would go up /at the level that they did/ for long enough time for them to break even. House prices were going up in Canada too. Ontario was going through a boom. Alberta housing market was exploding, but you didn't see Banks going crazy, lending money to anyone that asked. Why? Because they didn't an implicit agreement that government would guarantee subprime loans. They didn't have government pushing them to make subprime loans. They didn't have Fannie and Freddie.
>A lot of these loans were bought out by Freddie and Fannie afterwards anyway, so the original lenders didn't have any risk.
There it is. It's not the fact that house prices were going up that was the problem. It's the fact that lending to a particular high-risk high-reward demographic, carried no risk - which rationally promotes that action. You want to engage in high-reward behavior if the risk is removed.
Oh come on. I'm 100% sure Banks didn't think this way. These Banks that were in business for decades through many market cycles. These Banks also issued mortgages that would last decades. It is a huge risk to believe that house prices would go up /at the level that they did/ for long enough time for them to break even. House prices were going up in Canada too. Ontario was going through a boom. Alberta housing market was exploding, but you didn't see Banks going crazy, lending money to anyone that asked. Why? Because they didn't an implicit agreement that government would guarantee subprime loans. They didn't have government pushing them to make subprime loans. They didn't have Fannie and Freddie.
>A lot of these loans were bought out by Freddie and Fannie afterwards anyway, so the original lenders didn't have any risk.
There it is. It's not the fact that house prices were going up that was the problem. It's the fact that lending to a particular high-risk high-reward demographic, carried no risk - which rationally promotes that action. You want to engage in high-reward behavior if the risk is removed.
