Quote from the article: "The business proved extremely profitable for the banks, which earned a fee for each mortgage they sold on. They urged mortgage brokers to sell more and more of these mortgages."

This is a very interesting topic, one I've thought about a lot. In attempting to understand the cause, I've forumulated some hypotheses about how and why the sub-prime 'crisis' came to be.

But first some background. After earning my Master's ('04), I was having a very difficult time finding employment. I thought what any lifetime academic tends to think -- maybe more education will help?

So I enrolled in and aced just over 3/4 of this "ProSchool" course for Real Estate Brokerage. In it, I learned all about how Realtors and their mortgage broker cronies operate. Suffice it to say that I also came to discover that my personal ethics possess integrity > the ethics of most people in the real estate industry, which is why I decided to not pursue that path.

Sub-prime mortgages are to the real estate industry what lemons are to the auto industry. And while there are laws protecting people from rapacious salespersons in the automobile industry, there aren't really any such protections for homebuyers. It's probably important to note that I don't really consider "mounds of paperwork" a means of protection, especially when buyers don't understand what they're getting into for the long-term; it doesn't matter how many pieces of paper they're told to sign -- those pieces of paper are usually protecting the interests of real estate and broker-finance persons.

The root cause, the motivations of realtors, brokers and car salespersons are the same: commissions and fees earned, amounts directly proportional to amount exploited from customer. Think about it like. . . commissions and fees are beneficial to people 'from the top down' in a type of order-of-operations' that's similar to the mathematical order-of-operations. Who gets paid and when, according to this model:

1. Financial Institutions (banks control real estate brokers; as the article states, banks pay themselves first);
2. Brokers (brokers control agents; brokers pay themselves first and then pay agents);
3. Agents (agents or specifically real-estate agents conspire among themselves to artificially inflate housing and property values. There's no such thing as a real estate agent who rents!) [P.S. I think they are evil root cause of insane rents as well];
4. Property Managers or Landlords (both can be controlled by agents, managers pay themselves first, by rules have no qualms about repossession or eviction).

Obviously, the entities in the list all get paid their fees or commissions immediately, or at least within a couple of months of the occurance of a sale or the sub-prime mortgage. Or even a regular mortgage.

Fast-forward to the time of the ARM-adjustment, and the mortgagee can't pay the significant increase. Poor dumb customers? Not always. . . isn't it job of the fee/commission earning realtor or broker or finance person to explain exactly to the customer what he or she is potentially getting into? Yes, but often these people gloss over the details. This is why I think the lemon analogy makes a lot of sense. Who in their right mind would pay full-price for a vehicle they know is going to be inoperable within a year or two?

I think what this essentially boils down to is people in the banking and real estate industries transferring their risk to the people least able to handle it and then not being legally accountable for their ethics.