... And Then We All Had Mortgages

With the introduction of mortgage pass-through securities (see prior post), virtually any investor could partake in the buying and selling of securities backed by home loans. And this is exactly what happened: hedge funds, wealthy individuals, mutual funds, pension funds, university endowments, and even the banks that initially originated the loans bought these securities with great zeal. For many, home loans seemed a great investment that would yield strong returns. Instead of the banks earning the principal and interest on the loans they had originated, it was now these investors that would receive the principal and interest payments on the loans. (Side note - we call these securities mortgage pass-throughs because the borrowers’ principal and interest payments are literally passed through the security to the investor who receives them). With such a large demand for these securities, mortgage bankers originated more and more loans to individuals. Again, they were able to do this because the banks could package the loan into a mortgage pass-through security, sell it to investors and receive cash for selling those loans. The bank used this cash to make more loans.

Homeownership increased at an exponential rate. While it was once true that it was quiet difficult to get a mortgage, now almost anybody who applied could get approved for a loan. It was not a problem if an applicant made $30K a year, had no cash for money down, or had poor credit history. In fact, a borrower did not even need to supply paperwork to support his or her income or employment. Borrowers applying for $350K loans were stating that they made $80K as an employee at McDonalds and nobody was asking questions, or requesting income verification.  Home loans became abundant and credit (borrowed money) was increasingly easy to obtain.