My daughter has to do a research paper, and the topic she chose is “The Fall of the Mortgage Industry.”

Summing up the “Credit Crunch” or “Mortgage Meltdown” in two pages or less should prove quite challenging.

Two of the most salient questions she asked as we were discussing the matter –

– Isn’t that fraud?
– Why were people getting loans they couldn’t afford?

These are a few of the articles I had her read:

Subprime: Whose fault is it?
The full subprime letter from Hayman’s Kyle Bass (via Blown Mortgage)
Foreclosures, Defaults and the National Real Estate Market

She just couldn’t fathom this, from Kyle Bass’ letter:

The key reason the Subprime problem exists as it does today has to do with the wanton disassociation of risk inherent in the machine that churns out Subprime loans. Unlike the S&L crisis of the 1980s, the mortgage lenders of today aren’t taking their own balance sheet risk when underwriting loans. These brokers get paid for quantity REGARDLESS of quality. The balance sheet risk is transferred through three entities in less than 90 days from origination. The originator will originate ANYTHING he can sell to a whole loan buyer to pass the hot potato on. Whole loan buyers are simply the aggregators of loans at the Wall St. firms that aggregate, package, tranche, and sell as quickly as they possibly can to the clueless buyer. This transference of risk is the crux of the Subprime situation. Just think about it -if you were a 20-something making mortgage loans in California using someone else’s balance sheet and being paid per loan (with no lookback to performance of the loan), how many dubious loans would you underwrite?

How would you explain the mortgage mess to an 8th grader?

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