All of the banks have these toxic loans on board. And they all knew that they were crap. But real estate works in cycles, and the first rule is you never leave money on the table during a boom market–you’ll need it when things go bust, as they always do.
But the big banks and mortgage financial giants are not going out of business and will not need a bailout. During down times they just prune their operations, and if its really bad they will prune away everything except an information hub. Because they are not in the home business, they are in the number tracking business. That’s all they need to do, track these records until they reach some sort of decision point (foreclosure, pooling for MBS, etc), capture the releveant information and route it to processors and decision makers. It makes no difference if they are routing info inhouse, or if they are outsourcing. They just track the records.
The only difference with this cycle is that the boom was very big, so the inevitable correction will be big as well. As will the scale of the layoffs and pruning.
