How Did We Get In this Mess?

The best and most concise answer as to how we got in this mortgage crisis can be found in a brief article by Professor John M. Quigley in "Compensation and Incentives in the Mortgage Business" published by the Berkley Electronic Press. He also explains how a restructuring of incentives can avert future problems.

One does not need to invoke the menace of unscrupulous and imprudent lenders or of equally predatory borrowers to explain the rapid collapse of the mortgage market as house price increases slowed in 2006, before ultimately declining. There were certainly enough unscrupulous lenders and predatory borrowers in the market, but the incentives faced by decent people—mortgagors and mortgagees—made their behavior much less sensitive to the underlying risks. The only actor with a stake in the ultimate performance of the loan was the mortgagee. Everyone else had been paid in full—way before the homeowner had made more than a couple of payments on the loan.