HLS, I think bob007 was dead on when he said that home loans originated in the last few years generally offered very low extra returns to start with.
Sure, you could choose to lever up those returns – and the risk – by borrowing to buy more home loans or their derivative assets, but that’s possible with any asset. That doesn’t change the return or risk of the underlying asset. We don’t say that equities offer a 25% long-term rate of return just because buying them with lots of borrowed money would have gotten you that return over the last 50 years.
And although I think the rating agencies did a poor job of rating the securities backed by recently issued home loans, I would lay 90% of the responsibility for underestimating the risk, and driving the whole process in the direction it took, squarely on the investors. It was greedy investors looking for higher returns than offered by Treasurues that decided, of their own volition, to invest in bonds backed by home loans. They did this even though anybody, sophisticated or not, could see that the prices of the homes, and the generosity of the loans, were becoming ridiculous.
If you were selling something, and buyers made it clear they didn’t care about the quality of what you offered, wouldn’t you too eventually cur corners? It’s the buyers’ fault. They were a little dumb, but mostly greedy.
