Well the banks weren’t making loans to people who couldn’t afford them. They were making 100% finance loans, but it was still based on income. There were very very few prosecutions for fraud in the mortgage space. People weren’t overstating their income. But both banks and consumers were assuming their income would continue.
The relaxing of credit standards and subsequent retightening might have played a small part. But whether you have a 100% loan or an 80% loan, when your job goes away, you’re going to default. And the reason the jobs went away can be seen in the oil price chart in 2007 a year before the mortgage crisis.
Now we have another oil price spike. And it’s taking a toll on disposable income, consumer psychology and jobs.
Were you familiar with the workings of the subprime mortgage market?
That is exactly what they were doing...on a massive scale.
Check this out (from NPR no less):
Lenders let people pay more than they could afford for homes and devised extraordinary methods of doing so: loans described as "NINJA" (no income, no job, no assets), "liar" (no-verification "stated income" loans) and "exploding" (loans where the monthly payments would "explode" after a two-year promotional rate). Subprime lending soared.