[ejstronge]

> said that government regulations forced lenders to accept more default risk--meaning they were forced to lend to people they would not otherwise have lent to because the risk of default was too high. That's what "subprime mortgages" means, and those were a huge contributor to the crash.

The ratings agencies are free to rate things as they wish - unless maybe you’re saying there’s a government directive to misrate things?

Also, please clarify how the government is compelling lenders to make loans that don’t pass the lender’s underwriting criteria… this is news to me

[oooyay]

It's a half truth; the truth is somewhere in the middle of this and another theory. I'm not an economist, but the start of my professional life was marred by the experience of 2008 so I spent a lot of my time reading about it.

A source from the other side of this equation: https://www.cbsnews.com/news/heres-what-really-caused-housin...

In reality, there were a lot more sub-prime loans but only one of those lenders was actually expected to take on sub-prime loans. That's to say, taking on more sub-prime loans was a choice reflected in an ecosystem of incentives where profits were falling because a few lenders started a campaign to lower borrowing standards and the rest of the herd followed to stay afloat. What also happened was that lenders were essentially over weighting sub-prime loans into these packages and then using their relationships with the privately controlled ratings agencies to rate them the way that would be if they were filled with primes. If you read between the lines lenders found the solution to their profit problem and were trying to justify its stability post-hoc through package ratings. The reality is that sub-primes are highly profitable when they work out because they have high interest rates. When they don't they're not that expensive because generally the property is offloaded but this only works up to a magical threshold depending on a lot of risk variables. Once you go beyond that threshold and the dominos begin to fall, they all fall spectacularly. Risk traditionally should be leveled by packaging them with less risky loans.

[pdonis]

> please clarify how the government is compelling lenders to make loans that don’t pass the lender’s underwriting criteria

It didn't. Instead it required the lenders, by law, to change their underwriting criteria so that loans which the lenders would previously have chosen not to make, because they were not within their underwriting criteria, were now within their underwriting criteria. It also passed laws forbidding lenders from refusing loans to people who met their underwriting criteria. This was all done on the theory that encouraging home ownership was a good thing and that lenders had been arbitrarily refusing loans to people and needed to be stopped from doing that.