...Loosely regulated companies, financed with flighty short-term debt, did much of the riskiest lending. Loan-servicing companies, which processed payments and managed relations with borrowers, lacked the incentives and resources needed to handle delinquencies. Private-label mortgages (which aren’t guaranteed by the government) were packaged into securities with extremely poor mechanisms for deciding who — investors, packagers or lenders — would take responsibility for bad or fraudulent loans.
After the crisis, Congress and regulators took action to prevent a repeat. New rules eliminated the worst of the pre-crisis loan products. Higher capital requirements made banks somewhat more resilient. Yet it’s becoming apparent how much the reformers missed.As soon as borrowers started defaulting in significant numbers, chaos broke out. With little cash or capital, non-bank mortgage lenders imploded by the hundreds. Servicers left borrowers in the lurch — some went out of business, while others saw that they could make more money by foreclosing than by modifying loans. The parties involved in securitizations became embroiled in legal battles about who owed what to whom — litigation that goes on to this day.
In recent years, highly regulated institutions such as Bank of America — burned by billions of dollars in fines — have shied away from the mortgage business. Instead, they provide short-term credit to nonbanks such as Quicken Loans and PennyMac, which do the actual lending. Nonbanks now originate some 60 percent of new mortgages.
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