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.
As a bank, you may think that the $400,000 that you lent on a $500,000 home is still safe until Countrywide forforecloses (because they lent 125% of the appraised value) on the house next door and puts it back on the market for $350,000. In fact, as the lender, you may be required by the loan provisions that your Loan to Value doesn’t exceed 90%. By law, you may have to go back and tell the homeowner that they need to put another $85,000 down payment to get the loan in conformance.
