Interesting article (possibly behind the paywall) in Friday’s the Economist on the causes of the lax lending standards that have subsequently blown up. It points to some research by Atif Mian and Amir Sufi of the University of Chicago’s graduate school of business which points the finger directly (and unsurprisingly) at the process of securitisation, where the loan assets were parcelled up and sold off with little or no residual risk being held by the originator of the mortgage (i.e. the lender).
While this is the consensus on why this happened, the evidence presented is useful and should allow for these deals to be better structured in the future – with a fair amount of the residual risk retained by the actual lender.
Perhaps the first question that purchasers of such instruments should ask in the future is how much of the risk is with the originating lender – and do not touch it if the answer is either “not much” or “none”. The actual lender should be in the first loss (or “equity”) position for a reasonable amount.