Would like to re-state few details about the role of Financial Institutes in US (US + International banks and non-banks actually) leading to the 2007 crisis.
- due to capital requirements, banks care about their b/s size. US Banks generally didn't like to put mortgages (normally fixed rate, up to 30yrs) onto their books.
- These FIs normally initiated these loans but then sell them to the US-government owned (but not guaranteed) bodies like Fannie mae / Freddie mac etc, which in turn funding themselves and leverage part of the risk by red-packaging them in mortgage back securities (MBS).
- These FIs were also issuing MBS themselves.
- By issuing MBS, these FIs mitigated majority of the credit risks of these mortgages. So they did not care whether these mortgages will default eventually.
I remember at that time, zero down payment loans were popular. There were also mortgages with amount exceeding the purchasing price of the properties.