Quote:
Originally Posted by MetaMan
My question is how was it legal for banks to write so many sub prime loans? the housing market will not rebound. not in 3 years, not in 10 years.
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There was a lot of deregulation in how things like mortgages could be bought and sold. It wasn't that long ago that you would get a mortgage from a bank, often your local bank, and they would hold it for the life of the loan. The only time it would change hands is if you sold the house or something terrible happened to the bank and they went under.
A friend of mine bought a house about 5 years ago. The mortgage has already been sold four different times. It's crazy.
This deregulation also allowed regular banks to become investment banks and vice versa. A regular bank would hold a mortgage and use that as an asset in reserve that they would loan money against. They made their money by giving out loads like car loans, other mortgages, home improvement, credit line etc. When this law changed it now allowed these normal banks to take those assets and invest them on the open market in stocks, bonds, derivatives, hedge fund ect. So many banks started buying more mortgages so they would have more "assets" in reserve which allowed them them further invest and make more money.