Why were lenders so careless in issuing subprime mortgages?
There are three main reasons that banks relaxed lending standards when issuing subprime mortgages. The first was increased demand from Fannie Mae and Freddie Mac, who were under orders from the federal government to help increase homeownership for low-income families. Banks realized that Fannie and Freddie would buy almost any subprime mortgage and increased their lending to feed this demand. Fannie and Freddie took on the ownership risk of the subprime mortgages so that more of them could be issued to expand homeownership. The second reason stemmed from this increase in demand. As some banks began making money hand over fist by issuing subprime mortgages, every other institution felt the need to compete for this business too. A feeding frenzy emerged where risk concerns were subordinated to keeping up with the success of competitors. And finally, lenders were careless because of commission-based compensation structures that encouraged increased mortgage origination. The financial ince
