Greed Is Not Good

We all know that part of the housing meltdown was caused by people buying houses that they couldn’t afford.

But what’s gotten far less attention is that many people who qualified for conventional mortgages were steered into more expensive sub-prime mortgages.  Some of these sub-prime borrowers ended up losing homes they could have afforded if they’d just gotten the prime loans their incomes and credit histories justified.

I have known for a long time about this unfair treatment of less sophisticated borrowers (disproportionately minority and less-educated) because of the lure of higher commissions on sub-prime loans.  But I didn’t know how dramatic the difference in commissions was.

In his column in the NYT today, “A Banker Speaks, With Regret,” Nicholas Kristof interviews a former banker with Chase who says that commissions on sub-prime loans were sometimes seven times higher than those on prime.  That was an enormous incentive to saddle a prime client with a sub-prime loan and set him, and all of us, on the path to ruin.