The Hill News

Until the recent market crisis, banks in the past few years often made mortgage loans with zero to 5 percent cash down coupled with 95 to 100 percent of borrowed money. The relaxation of mortgage underwriting standards declined for a number of reasons, but foremost among them was government policy. Over the past 20 years, government housing policies encouraged universal homeownership and, as an unintended consequence, lower credit standards. The loose lending standards were exacerbated by exceptionally low interest rates, which drove additional demand from would-be homeowners. In addition, banks packaged and sold many of their mortgage loans to government-created Fannie Mae and Freddie Mac, and as CMOs to Wall Street. Even though the originating bank kept a small subordinated interest in the CMO, it no longer had the same interest in the integrity of the loan. The bank made its money from the origination and servicing fees â€" not from the interest and principal paid on the mortgage.

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