Cheap Money

The truth is that the rise of mortgage pass-through securities is only part of a much larger story. Borrowers are rational individuals. If a bank offers you a mortgage at an interest rate of 12% you might decide that it would be too expensive to accept that loan, and instead decide to rent a home. But what if the bank offered you a loan at an interest rate of only 5%? You would certainly be more inclined to take the loan with the lower interest rate. While the first part of the story explained how credit was getting easier to obtain, the second part of the story is that borrowing was becoming cheaper (interest rates were declining). The Federal Funds interest rate is the rate at which banks can borrow money from the Federal Reserve. Take a look at interest rates in the years leading up to the credit crisis.