The lender makes the loan because he’s more interested in the short term profit than the long term profit. Investors are to blame – we all want high profits today, an easy life today, rather than sacrificing today for a better life tomorrow. (Another example is the entitlement program, which officially has made the US into a bankrupt country, because it is impossible to meet the promised obligations, so they will either print money like mad or default on the promises – bankruptcy.) So the lender makes the loan just to have another loan on the books, sells it to the MBS buyer (your Aunt Margie’s pension fund, the police officers’ pension fund, the San Diego County pension fund).

So if we want to chase this all the way to the source, it is the high returns desired by pension funds, is it not, that allows this to go on? SD County is an example: in their quest to eke out the highest returns for the least amount of money put into the fund, they take on unethical amounts of risk by investing in hedge funds, MBS, and all kinds of stuff. Do we even know what they are invested in? That would be an interesting topic.

Fixed income funds hold MBS too. Check out the prospectus of any fixed income fund, and you’ll likely find MBS (mortgage backed securities).

Ultimately, the investors are to blame for having given up the risk premium.

The government should be protecting the public from this kind of stuff, but they failed.

If the lender sells the loan off anyway, they don’t care if the loan performs. CA needs to hurry and implement the new lending guidelines. So far, only 20 states have done so.

lostkitty – I’ve been encouraged to have a section on my website for fraud. I can certainly include examples of fraud like this, but there is the risk of being sued by the people I’m discussing. So I’m not sure of the best way to handle it.