You are all missing the point; even if you kept your nose clean and only made loans to people with 800 credit scores with 20% down, the underlying value of the assets that you lent on have been severely affected by your competitors.
Not if you didn’t use inflated appraisals and used your own appraiser as a bank. Banks make money two ways on a loan. They make it on the carry spread (difference between the cost of the money they are lending out and the amount they charge) for the loans they keep and they make it on finance fees and securitization charges on the ones they sell.
A lender has every right to refuse to lend $400,000 on a $500,000 property because they feel the underlying value is really $350,000. They don’t have to follow the ‘crowd’. Let some other lender take the risk. Unfortunately they got greedy and picked up those loans; promptly securitizing them, labeling them AAA and selling them to get rid of the risk. The lenders (many, not all) forgot that by law, if they misstate the risk or fundimentals on the CDO/MBSs, the originating lender can be forced to repurchase the securitized loan package. The lenders that did not forget about the law formed wholly owned subsidiaries to funnel the money through, using the corporate shield to protect themselves from liability.
