Other than the major difference between analyzing a specific personal risk, there is an often unsung villain at play in that. The federal government was pushing the lenders into making the loans using more “open” risk criteria. It was doing this through the threat of being called into court over discriminatory lending claims.
That caused a fundamental shift away from what had been proven to keep default rates low to such things and “no down payment” loans with a balloon payment all attached to a variable rate mortgage. It caused the banks to either fight the fed’s ignorance nor court or find a way to “approve” loans that were more risky.
To me this was the disconnect at the risk assessment level. The risks were essentially calculated on having qualified. I don’t think there is enough evidence to say one way or the other but I suspect there was not a concomitant change in risk assessment. We had a veritable cornucopia of new, and thus untested and without historical data, loan types with lower qualification criteria.
This result was not limited to the subprime loans either. After all if someone who should not have qualified can now qualify, then someone who previously would have qualified can now qualify for a significantly larger loan. Had it been limited to subprime I suspect the impact would have been significantly less. But as any economist can tell you, raising the bottom rung pushes the whole ladder. Those effects are almost never linear; they are often amplified and magnified.
Now, on the personal level it is our job to evaluate our risk. No employment for the past five years but the Government will back you for a 200k loan? Yes, if you can not see the risk in that at the individual level you bear the responsibility. I saw several such loans being taken out by people I knew. Their response when I pointed out what I thought should have been blindingly obvious?
Well, if I got approved that means there isn’t much risk.
This is another side effect of lowering standards to broaden approvals. You shift the weight people had previously had in the system to make an accurate call. Exacerbate that by these being backed up by, for example, FHA and you add the authority of the federal government saying it is ok.
Bit to me, that still doesn’t absolve personal responsibility for looking into it, anymore than we should absolve the federal governments social engineering in the industry.
