The real estate bubble, and the resulting mortgage crisis and financial crash that followed, was driven, to a great extent, by lending institutions that needed product to sell. With the fail of interest rates on investments like Treasury bonds, investors worldwide needed somewhere to put their money that would return a higher interest rate.
That place was securitized mortgage loans, which because of the historically low default of 30-year fixed rate mortgages, were seen as safe an investment as U.S. Treasury’s. By the early 2000s, the market had vacuumed-up all of the traditional 30-year FHA-type mortgages.
However, there was still a large market for these bundled mortgage securities. And Wall Street was making staggering sums of money off these transactions.
This drove the market to “invent” more and more loans that were highly questionable under traditional mortgage underwriting standards. They needed more borrowers and had to sell them to virtually anyone who would walk in the door. They employed such problematic loan devices as NINAs, “no income no assets” to expand the number of loans they could book and therefore resell in the securitized bundles of mortgages.
By this point, it had become little more than a trillion-dollar Ponzi scheme. It, of course, was not sustainable. For investors to earn any return on their investments, borrowers need to be able to make their payments. Which they could not.
Eventually, the house of cards collapsed, taking millions with it, and causing millions of bankruptcies and foreclosures.
And now, it appears the process is repeating itself, only this time with auto loans.
More on this next time.
The New York Times, “Investment Riches Built on Subprime Auto Loans to Poor,” Michael Corkery and Jessica Silver-Greenberg, January 26, 2015