Subprime Debacle - How Did We Get Into This Mess In The First Place ?

I have read a veritable cornucopia and plethora of news articles, journalistic exposés, video, etc (some of which are posted here on my blog - See "House of Cards" video from 60 Minutes)  but none have summed it up as well as this article below or have gotten to the real "ground zero" cause for the whole sub-prime lending debacle that led this country into the recession that it STILL is in today.

It also behooves me to think that quite a large number of media article headlines are labeled very poorly or incorrectly IMHO and AFAIAC.  The headline should be basically what the article is about or its main point.  Is the article below really about how borrower attitudes changed, and do you really care about that part of the story ?  No !  It really is about; as I captioned this article, "Subprime Debacle - How Did We Get Into This Mess In the First Place"  That would pique someone's interest more.... the answer follows below, and I will step down from my soapbox now.  : )


New Mortgage Guidelines Changed Borrower Attitudes --  (excerpts from article copied below)

The new study, authored by Clifford Rossi for a research arm of the Mortgage Banker's Association, claims banks took on greater and greater risk by adopting new kinds of exotic mortgage loans that were originally developed for sophisticated borrowers, not the general population.

Riskier mortgages such as option ARMs and negative amortization ARMs were originally developed by Golden West Financial for their upper echelon borrowers. Golden West, a onetime mom-and-pop savings and loan in California, marketed these loans to borrowers that it knew were "creditworthy and financially strong," according to Rossi.

Other banks, such as Countrywide, Washington Mutual and IndyMac, then started to make these exotic mortgages available to the general population. All three of those banks are now out of business because of these risky loan choices. Golden West also lost billions on these option ARMs. Wachovia bought Golden West and ended up imploding.

Now these exotic mortgages and sub-prime loans are blowing up in the face of bankers and investors, as millions of borrowers who were steered into these products are in foreclosure or walking away from their commitments. The study quotes former Federal Reserve Chairman Alan Greenspan as saying a few years back, "Where once more marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately."

It is doubtful that there are many out there who still think Greenspan was right.