Opaque subprime mortgages spread because banks had to match fly-by-night lenders to survive

Evidence

Experts often describe the run-up to the financial crisis as a “race to the bottom.” In reality it was a veritable track-and-field meet of such contests: some of them played out in the marketplace, others inside the government. Out in the financial marketplace, in the 2000s, opaquely marketed subprime products pioneered by unregulated, fly-by-night, nonbank mortgage lenders began to take off in the mainstream. Much as in the credit card business—where the boldly marketed 4.9 percent teaser rate masks the 18.9 percent rate that will eventually kick in—these were often mortgages that masked exploding costs down the line. Banks and thrifts, in order to hold their own, had to jump in with similar products, lest their plain-Jane fixed-rate mortgages look expensive by comparison. In market after market, hiding the true costs and risks of a product became a requirement for survival. — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 349

Categorization

• CANDY: The teaser-rate example (4.9 percent masking 18.9 percent) is a vivid, tweetable instance of predatory product design.
• XREF: connects to: Sub-prime lending exploited the American Dream myth to sell mobility to marginalized borrowers — Max Haiven, Cultures of Financialization, 528; Packing risky mortgages into opaque derivatives under weak regulation enabled the financial crisis — Albert Bandura, Moral Disengagement: How People Do Harm…, 1492; Exploding mortgage-security demand forced lenders to invent worthless borrowers. — Mark Blyth, Austerity: The History of a Dangerous…, 94 (+2 more)

Broader Connections

• Packing risky mortgages into opaque derivatives under weak regulation enabled the financial crisis #expands (0.85) — Albert Bandura, Moral Disengagement, 1492
• Exploding mortgage-security demand forced lenders to invent worthless borrowers. #expands (0.82) — Mark Blyth, Austerity, 94
• Bundled bad loans hid their risks and true value from investors #corroborates (0.78)
• Blaming borrowers’ financial ignorance obscures the structural logic of sub-prime lending #expands (0.75) — Max Haiven, Cultures of Financialization, 528