You forgot to spread the blame around - nice try tho - LOL
The home prices growth in early 2000s was completely unrealistic (that's obvious now). It made homeowners believe that the prices will continue to grow and make future refinance and second mortgages quite profitable and eased lending standards allowed them to buy more expensive homes than they could afford with traditional fixed rates loans and more expensive than they can afford now when their adjustable mortgage loans are resetting. I cannot avoid sympathy I feel for those borrowers, but I must say that I believe a large number of them carries great part of blame for current mortgage crisis as they ran into flexible loans like option ARMs without understanding them, or even lied on stated income loan applications.
Lenders where prompt to offer these riskier loans to subprime borrowers as loan products with adjustable rates transfer great part of a risk from the lender to the borrower. This risk transfer was also main reason why they often offered greater commission to brokers if they sell adjustable rate loan. Probably some of the brokers were overtaken by greed and were offering and suggesting adjustable mortgages to borrowers who would qualify for prime loans. But banks and other lending institutions did not expect such a large number of foreclosures and extreme decline of house prices. Now, they are paying the price as the large number of defaults resulted in great losses for those lenders offering subprime loans.
Central banks and other large investors have also suffered significant losses as a result of mortgage asset devaluation. The risk of investing in subprime mortgage backed securities wasn't realized as it should been.
The investors relied on investment grade ratings applied to mortgage backed securities by the rating agencies. Here we come to the one of the main aspects of subprime crisis. Rating agencies provide their investment rating model based mostly on historical data. Mortgage backed securities have excellent historical data. But adjustable mortgage loans and all theirs innovative variations are new products on mortgage market and have no historical data. Does this fact leaves rating agencies free of blame for investment losses? I'll leave this question open. Regulators have also turned their attention on investment grade ratings and doubt that rating agencies were in conflict of interest.
But regulators themselves are also one of the main factors accused for the mortgage crisis. They missed to prevent crisis through legislation that would regulate higher lending standards. They are expected to play a great role in future prevention of any kind of economic crisis.
Causes of Subprime Crisis | Mortgage Home Loans - Info Center