Why do businesses like home mortgage(CountryWide) lead money to people who can not pay it back?

Question

From the news media, there are a lot of home foreclosures from mortgage companies such as Countrywide. The employees who write these loans have business degrees and experience in home mortgages yet they go ahead and create and approve loans that can't be repaid! Can anyone explain to me why would any business do something like this?

Answer 1

Because they make their money from selling these bad loans in the marketplace to idiotic hedge fund investors who have no idea what they are even investing in.

The bank takes the bad loans, packages them together with other bad loans, and sells the package. The banks make tens of billions of dollars and, when the loans go bad, lose just a few billion dollars, not nearly enough to make up what they made in the first place.

Then, the Fed buys these bad loans with newly inflated money, and the banks are off the hook again.

We shouldn't be surprised when banks can screw us over, make money, and then have their losses from screwing us over be transferred back to us through inflation.

Answer 2

Up until very recently Countrywide and other lenders made loans they knew the recipient could not repay because they sold the loans to other companies as soon as they were written, before the recipient defaulted. By the time the loan went bad, another company would be holding it -- Countrywide had made its money.

The sold loans were pooled into a supposedly homogeneous mass -- a properly mixed portfolio of loans in theory greatly reduces risk. These nearly "risk free" financial instruments were then sold to institutional investors.

Answer 3

If you lend money to a 1000 people, 3 percent of them won't be able to pay you back as promised. That's 30 people. You don't know which people will giveyou the problems when you make the loans.