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A Perfect Storm of Irresponsibility
Bundling of loans into assets that were then hawked to investors is a major issue in this mortgage storm we are all feeling by now. What contributed in a large part to this financial disturbance was a weak system of accountability, termed "moral hazard, by Atif Mian and Amir Sufi of the University of Chicago's business school, between those who evaluate a borrower for the borrower's realistic ability to afford the loan he/she is taking out and those who will be responsible for dealing with the borrower's default. The bundling of these loans, called "securitization" (property and the associated loans are great for securitization because property is illiquid and has a steady cash flow.) and the demand to trade them for profit led to the weak lending standards. These were standards allowing both those who could not afford the homes they were buying to purchase anyway and those who would lend money the flexibility to lend money they had no right lending...a perfect storm of irresponsibility. By now most of us see securitization as a major force for having brought together the housing high and the mortgage low. Do the conditions remain for this type of irresponsibility to happen again? Will new systems arise to cause another storm in the future, and what could they be, so we can predict it now? |
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May, 2012
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