We've talked before about critiques of the loan underwriting at the heart of the financial crisis; basically, the judgment needed to do good borrower evaluation dissappears when you take the human element out of underwriting, a problem compounded by the monetary incentives to produce and sell as many mortgage-backed securities as possible, regardless of the quality of their content. Even J.P. Morgan chief Jamie Dimon agrees:
Dimon ruefully observed that the optimal way to deal with delinquent loans would be to evaluate customers one at a time — the way the bygone corner banker did when a borrower got sick or lost his job. Of course, corner banks disappeared when conglomerateurs like Dimon acquired them. But it's important to remember that the mass production of mortgages was welcomed early in the decade, because it allowed more people to get credit. Society wants banks to make loans, only not with such improvidence that large numbers of borrowers end up defaulting. There is, again, a tension between these goals; and when mortgage shops were converted to factories, banks lost sight of how to manage it. “This is way beyond the capacity of the machine,” Dimon admitted.
That's from this long profile of America's (arguably) most successful banker. It is a bit foolish, though, to try to blame "society" for asking for more mortgages. As a society, we tried to encourage homeownership by way of things like the Community Reinvestment Act, which promoted sensible loans to underserved communities with few problems for nearly 30 years. The serious challenges arose when unregulated mortgage brokers started selling ridiculously irresponsible loans and Wall Street invented a way for everyone to pretend those loans, packaged together, were as good as cash. That's not a response to society's need for credit; that's a response to bankers' (and many speculators, no doubt) desire for profit.
-- Tim Fernholz
