Barry Ritholtz found this article by Prof. John Quigley that explains how so many people turned a blind eye to the growth of the Big ShitPile. Here's a couple of excerpts:
The incomes and fees generated are all transactions-based, that is, payments are made at the time the transaction is recorded. The originator of the loan, typically a mortgage broker, is paid at the time the contract is signed. Brokerage fees have varied between 0.5 and 3.0 percent. The mortgage lender earns a fee, between 0.5 and 2.5 percent, upon sale of the mortgage. The bond issuer is paid a fee, typically between 0.2 and 1.5 percent, when the bond is issued. On top of this, the rating agency is paid its fee by the bond issuer at the time the security is issued. All these fees are earned and paid in full within six to eight months after the mortgage contract is signed by the borrower.
As result of all the early payouts,
The only actor with a stake in the ultimate performance of the loan was the mortgagee. Everyone else had been paid in full—way before the homeowner had made more than a couple of payments on the loan.
That last part isn't quite correct because we know now that we all have a stake in systematic failure of the credit market but the Free Market Fairy didn't think that was important enough to correct.
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2 comments:
Really effective data, thanks so much for this article.
Well, I do not really imagine it is likely to have effect.
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