Let me explain. The end holders of these mortgages are investors (central banks, pension funds,etc.). They demanded a low risk premium for investing in notes for overvalued homes. Had they expected a 5% risk premium, Ameriquest could never have offered a 2% ARM.
Second, capitalism makes companies compete. Further, Wall Street pressures on ever glossier profit margins has caused these lenders to accept ever-greater risk, ever-lower profit margins, just to compete.
The biggest blame goes to the elimination of risk premium, as borrowers qualified with no money down. If MBS holders had priced in a 8% risk premium for 100% financing, borrowers would not have qualified. They also couldn’t have bought homes for 6x their income if they needed even 10% down.
This is just a product of capitalism. Not bad, but the role of regulator is to tame the excesses. The OCC is doing that now, or trying, but they are a little late…The damage has been done.
