In the Housing Bubble, It Doesn't Matter Who You Lent the Money To

Duncan says:

[S]uddenly our great newspapers are discovering the "stereotypes" they helped to perpetuate weren't, you know, true. Subprime loans were never the problem, just an early warning signal about shoddy and predatory lending practices.

I keep thinking that what should be emphasized is that the economic mess we are in is the direct result of the bursting of the housing price bubble. That bubble was caused by the bond market dumping too much money into banks to invest in mortgages, and the bond market was permitted to do that because of hands-off regulation. This resulted in the prices of houses being bid up as the available credit became ridiculously cheap, not just in terms of the interest cost, but in terms of the transaction costs.

There are two transaction costs that are usually 100%: When a house price is too high, a mortgage lender is usually motivated to limit the amount lent to the buyer. And when a borrower is not creditworthy, a lender usually will not provide a mortgage at any interest rate. Both of these transaction costs were zeroed out by the pressure for mortgage originators to create product to be sold up the chain to the bond people. Absent those costs, some people who were not creditworthy borrowed, but even more importantly, people who were creditworthy were given loans that were unjustifiably large, allowing them to overpay.

So, the shoddy and predatory lending practices were an effect of the actions of the bond issuers and investors. And it's those actions, not the lending practices, that inflated the bubble. If the regulators and Congress had been doing their jobs, action could have been taken to stem the tide of money flowing into the housing market.