Courtesy of Mish.
In response to Reader Questions on “Credit-Worthiness”: Did Banks Give Mortgages to Non-Creditworthy Borrowers? I received an email from reader David, who wanted to expand on point number 5 below from my post.
This is what I stated, adding the words [banks thought]. The email from reader David follows this recap.
Five Reasons Banks Extended Credit in Housing Bubble Years
- [Banks thought] People would pay mortgage loans because they always did
- [Banks thought] Housing prices would rise sufficiently to cover defaults
- [Banks thought] Mortgage interest rates to subprime borrowers were high enough to cover risk
- [Banks thought] Defaults would happen over a long period of time, not quickly concentrated
- Banks could pass the trash to Fannie Mae and Freddie Mac (without clawbacks for non-performance), and/or loans could be sliced and diced in tranches to investors
If any of those conditions were true, then banks were indeed making loans to “credit-worthy” borrowers. Subprime borrowers did pay a huge penalty rate. Multiple combinations of the above five points are likely.
Huge Mistakes Coupled With Greed
Banks made huge mistakes because all five conditions above failed, far sooner than banks or the Fed expected. Recall that Bernanke did not believe there was a housing bubble at all!
Thus, at the time, banks thought they were making creditworthy loans.
They thought wrong, in a big way, and they were very greedy as well. Greed coupled with poor thinking is a very bad combination.
What About Now?
Banks are not lending now for three reasons
- Banks are capital impaired
- Banks are worried about being repaid
- The relatively small pool of credit-worthy borrowers who banks would lend to right now, do not want credit
Stunning Change in Attitudes…
