A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

Looser Lending Standards
To round out this dangerous picture, the financiers created
structured investment vehicles, or SIVs, that kept derivative
securities off their books, in places where the banking
regulators couldn’t see them. The mortgage-backed security
SIV would borrow the money needed to continue the process,
and all that showed up on the investment bank’s balance
sheet was a small investment in the equity of the SIV. In the
past, banking regulators might have flagged the vast leverage
and the risk it carried, but that was overlooked in the new
finance system.
This new system led to looser and looser lending standards
by bankers and mortgage companies. If the only risk a lender
took was the risk that a mortgage loan would go bad in the
few days before it could be sold to the investment banker, the
lender did not need to be as careful about the creditworthiness

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of the borrower. And so the standards for making mortgage
loans deteriorated sharply. When I took out my first home
mortgage, the lender insisted on 
at least
a 30 percent down
payment. But in the new system loans were made with no
equity down in the hopes that housing prices would rise
forever. Moreover, so-called NINJA loans were common—
those were loans to people with no income, no job, and no
assets. Increasingly, lenders did not even bother to ask for
documentation about ability to pay. Those were called
NODOC loans. Money for housing was freely available, and
housing prices rose rapidly.
The government itself played an active role in inflating the
housing bubble. Under pressure by Congress to make
mortgage loans easily available, the Federal Housing
Administration was directed to guarantee the mortgages of
low-income borrowers. Indeed, almost two-thirds of the bad
mortgages on the financial system as of the start of 2010 were
bought by government agencies or required by government
regulations. The government not only failed as a regulator of
financial institutions but also contributed to the bubble by its
own policies. No accurate history of the housing bubble can
fail to recognize that it was not simply “predatory lenders”

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but the government itself that caused many mortgage loans to
be made to people who did not have the where-withal to
service them.