The column is based largely on the study by Atif R. Mian and Amir Sufi of the University of Chicago’s Business School: The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis.
In the end the problem was severing the origination of mortgage loans from their ongoing management and servicing. The originators were motivated to increase the flow of mortgage paper, not necessarily to increase the quality of that mortgage paper. As evidence, you can look at the increase of NINJA loans (No Income, No Job or Assets) on the residential side of mortgage lending and the light covenant loans on the commercial side of mortgage lending.
Mortgage lenders farmed out the mortgage origination to brokers. The mortgage lenders in turn packaged the mortgage loans and securitized them. As a result, the broker and the lender were focused on the short term origination and not on the long term value of the mortgage debt.
In representing the borrowers of loans to be securitized, I often heard that the statement: “I can’t sell that in the market.” I never heard, “that will be affect my ability to manage or service the mortgage loan.”
The underlying economic problem is that the originating lenders did not keep any “skin in the game.” Nearly all of their economic return was in the origination, not the long term success.