Why are banks willing to lend money to people who cannot afford to pay them back?

One of the reasons that the recent addition of mortgages as commodities to be bought and sold on the market. The company that provides the loan to home buyer does not have any incentive to care if the home buyer is able to pay back the loan. If the plan is to sell the mortgage to someone else, the lender can just immediately cash in on the market value of the loan and move on. They pass the burden on to someone else, like a game of hot potato. This game of mortgage hot potato is what has been happening throughout the recent housing boom and someone will eventually get burned.

By betting “big” the banks ensure their government support in case of a total collapse. In fact, the bigger the problem, the more assured they are of a bailout.

What started in the Regan era (Chrysler) continued under Bush (Savings & Loan) and through to Bush Jr. (United reneging on its pension plans and Hedge Funds mess to come).

The scary thing is that we’ve just seen the beginning of the mess. Mortage default will lead to lender collapse — which will also take down the Hedge Fund industry — which are heavily invested in sub-prime mortages (Hedge Funds make their money on risky ventures, not safe ones). Private equity is driving this game, but they’ll be bailed out with public money. Notice how they’re all cashing out to go public all of a sudden?

What will be interesting is to see how the Fed Reserve acts to stop the dominoes. Will is jump in to stop individual foreclosures, temporarily shutter the banks, or bail out the Hedge Funds? Only time will tell, but one thing is for sure, we’ll all be left with the bill.

The concern I have is for ignorant and timid borrowers getting hoodwinked by slick lenders and agents. Still, truth in lending documents won’t protect risky individuals from themselves, and neither should we. It wouldn’t be fair to borrowers who take those risks and succeed – unfortunately those people aren’t mentioned above.

If high-risk borrowers paid low interest rates, then banks would be more likely to go out of business, because they would lose money on too many loans. Interest rates are calculated to protect lenders from risk. The poor and middle class are not “overpaying.” You are implicitly suggesting that it is the banks responsibility to fund a financially overextended lifestyle for borrowers with low income and bad credit histories. Not only is it not their responsibility, it would be irresponsible if they did so. And as the author said, they pay the price if they do (and overextended banks certainly are paying for it now).