The sharp fall in lending regulations, especially during 2006, resulted in unprecedented increase in housing prices. Knowing the risks lenders kept on lending and it is this that led to the foreclosure crisis we are seeing today. Those in the mortgage world understood the implications but immediate profits made them turn a blind eye. They had little concern for the borrowers who would surely default later on. By that time the loans would be turned into securities and the risks passed on to the investors. The scheme worked fed by the increasing greed for mortgage-backed securities that promised bigger yields than the safer investments in Treasuries.

Professor Jeremy Siegel of Wharton commented, “In the extremely low interest rate environment of 2002,2003 and 2004, people got very hungry for yields.” A mere 1% or 2% did not satisfy them any longer. They wanted more and more. “They were saying, ‘oh, here’s security collateralized against real estate, against a home. Thatneverdeclines in value.” This led to the making of a machine that generated unprecedented amount of mortgaged backed junk that was being repackaged as securities of apparently a very high order, said Marshall E. Blume a professor of finance.

Meanwhile Wall Street making these mortgage securities began to face a problem. Internal laws tied down many jumbo investors, regarding the grade of the investments. The sub-prime loans appeared too risky to be marked as top grade. Seeing the demand the financial engineering wizards began to make a cocktail of the mortgages with other types of securities. This extremely clever move led to a surfeit of securitizations and complexities.

Rating agencies played a prominent role in expediting the process. These agencies gave the green signal to potential issuers about the rating of the security. If they gave a negative answer that security would not be bought. But the rating agencies played along with the new tendency that seemed to please everybody. People were granted mortgages and walked into houses of choice, mortgage firms and Wall Street pocketed high fees and investors got the best-rated securities. Builders sold more and more houses and prices began to soar.

In 2006 the balloon burst with the pricking of the foreclosure crisis. This was the time when reality struck and resets began to happen. Monthly payments jumped by 25% to 50% – sometimes even more. Foreclosures took over the scene.