Bank of America Buys Countrywide, Definition of Subprime Anxiety

Perhaps in one of the largest bank saving episodes that you will ever see, if you have not heard about it already, Bank of America bought Countrywide, the purveyor of the subprime crisis and so inherited a few hundred million in bad securities loans and many of the lawsuits that are currently plaguing the troubled home mortgage lender. The details of the buyout were pretty clear cut—Bank America would absorb all of the bad debt that Countrywide had accrued, get the bank back on track through large loss write-offs and make it so that once again Countrywide could issues bank mortgages to borrowers in confidence, not under the veil of scrutiny that they have been subjected to over the past few trying years.

What caused the subprime home mortgage lender crisis?
There are actually many underlying factors that have all contributed to the subprime home mortgage lender crisis, and to be fair the fault does not lie only in the hands of the banks, contrary to popular belief. The culmination of the subprime home mortgage lender crisis is a combination of different underlying factors that when all placed into the brewing pot on the stove, boiled over and ruined the kitchen. To effectively explain what caused so many bank mortgages to flip up on their backs, mortgage interest rates to rise faster and home mortgage lenders to write off their largest losses in banking history, there are several factors to this equation.

Banks lent money to borrowers who were under qualified
The first part of the problem was that banks, eager to turn a quick profit, overlooked many aspects of their home mortgage lender underwriting policies—aspects that were created to best protect their (the banks) interests—in order to approve risky loans to lower income families that had low monthly introductory payments but that later reset to much higher payments; payments that many of these borrowers would never be able to make with their current incomes.

Unethical loan officers and bank employees encouraged this
Many loan officers who were happy to make a quick commission on these risky loans helped to fan the flames, typically working with actual bank employees and underwriters, who all kindly turned their heads the other way while they approved very risky real estate loans that they knew to be questionable. Thank banks knew better, and yet they still never took the time to verify incomes, document borrowers properly or even take a look at their own risk measurement methods and realize that they probably should not have been approving as many loans as they did.

The loans were then sold off as securities to foreign investors
As the banks began to realize that they may have goofed by issuing so many risky real estate loans, they quickly repackaged the loans and lied about the risks of them—so that foreign investors would buy them out thinking that they were sure thing. At the same time, many people were committing real estate and loan fraud, further adding to the downward spiral of the market and overall portfolio losses of the banks. Combine this with a falling economy, rising gas costs and food prices soaring, and you have the perfect recipe in the mixing bowl for what created the subprime crisis.