It wasn't borrowers or government that were pushing lenders into making higher-cost, exotic, risky mortgages. It was the lure of profit.
Anyone who doubts that should read a recent column by Gretchen Morgenson in the New York Times.
She tells the tale of a senior mortgage underwriter at Washington Mutual (WaMu) who, like many others at WaMu, was put under tremendous pressure to approve higher-cost, exotic loans because brokers and the lender would make more money that way. Questionable loans were pushed through because they were more profitable to the company:
"At WaMu it wasn't about the quality of the loans; it was about the numbers," Ms. Cooper says. "They didn't care if we were giving loans to people that didn't qualify. Instead, it was how many loans did you guys close and fund?"
How much would they get?
Hidden fees meant brokers could easily make between $20,000 and $40,000 on a $500,000 loan.
This is what happens when neither brokers nor lenders have an incentive to see that a borrower can actually afford a loan. In the current Wild West climate, brokers get their fee no matter what -- and a higher fee if they steer borrowers to a higher-cost loan. Lenders sold their loans to Wall Street firms, who then packaged them to sell to investors.
WaMu, of course, is one the banks that failed and was seized by federal regulators. It was sold to JPMorgan Chase, which is now trying to clean up the mess by modifying many adjustable rate loans to more stable fixed rate loans -- instead of incurring the cost of foreclosure.