Sub-Prime at a Local Level

It must have been so easy as a mortgage broker to simply "follow the money". Quick and painless mortgages available to the endless number of borrowers flooding in as leads --and no downside for anyone until so much later that everyone can overlook the impending storm. The borrower gets the low payment mortgage for the house he can't really afford, the broker gets his origination fee and commission (often by "fudging" the customer's credit worthiness), and no one pays heed to the obvious risk for everyone. The brokers are raking in fees, and feeling like this boom can never end as long as property prices stay high. But all the while, the very basis for their business is sinking under them.

The securitization of the paper means even the lending bank has no long-term concern with the real viability of the loan or the ultimate predicament that the borrower will surely have when, as must happen, the index to which their interest rate is linked, moves upward. And from the perspective of direct repercussions, only the investors in the mortgage-backed instruments get hurt. But the law of unintended consequences catches up. When your business perspective is short-term and solely self-interested, you are liable to have a business model that can only work so long as conditions do not change. So the mortgage broker model only works if the conditions are static: If property keeps rising in price, if mortgages keep being awarded to fairly weak applicants, if borrowers don't understand the real risk of the adjustable clause in their mortgages, and if banks keep lending 105% of the market value of homes. As soon as one condition changes the model collapses.

On the one hand, operating in the manner described above is naive and a sign of bad planning. On the other hand, to have such short-sighted vision points to a lack of principles, both ethical and strategic. And the outcomes prove it. Those businesses that counseled questionable borrowers away from risky mortgages, that suggested that fixed-income workers not purchase homes values at 20 times their annual salaries, and who carefully outlined for customers both the downside and the upside of their mortgages--they can still function; More likely than not, they would have had structures in place to hold their employees (both mortgage bankers and originators) accountable for the long-term status of the mortgage. In a Principle-Powered universe, the banks would also have had a way of incentivizing long-term stability and low default rates by linking their commission payments to those results. Instead, the institutionalized business model has been "when the ink is dry, the deal is done". But those who were themselves, Powered by Principle, will be far less damaged in these new economic conditions. Because even in the new conditions, their closing rate will be similar, and so, their revenue more stable.