>There are at least 2 sides to every loan - the originator and the borrower - and it helps to examine dynamics on both sides of the table.
You've kind of hit on a huge part of the problem - there's WAY more than 2 sides. Thanks to swaps, derivatives, and bonds, the originator isn't on the hook if the borrower defaults. The originator isn't even holding the loan anymore. They've bundled it up and sold it off to a 3rd party who never bothers to check if the loans are any good, because THEY bundle it up and sell it off ASAP to a 4th party. Repeat ad nauseum.
End result is that nobody in the chain is ever incentivized to actually check if the borrower can afford the loan they've been given. On one side, you've got a giant billion-dollar industry who whose best interests are served by issuing as many loans issued as without concern for the long-term consequences. On the other, you have the borrower. As we learned from the 2008 crisis, putting all the pressure solely on the borrower to think of the long-term consequences is not only unfair, it's dangerous to everyone.
> The originator isn't even holding the loan anymore. They've bundled it up and sold it off to a 3rd party who never bothers to check if the loans are any good, because THEY bundle it up and sell it off ASAP to a 4th party. Repeat ad nauseum.
"You get a hot potato, you pass it on. I passed it on. Listen, there were a lot of people who are very happy to get things taken care of for me. Hey, you know? It was really funny seeing how far and how fast that particular potato got passed on. That told me a lot about who was bright and who was not."
The Long Dark Tea-Time of the Soul - Douglas Adams
You've kind of hit on a huge part of the problem - there's WAY more than 2 sides. Thanks to swaps, derivatives, and bonds, the originator isn't on the hook if the borrower defaults. The originator isn't even holding the loan anymore. They've bundled it up and sold it off to a 3rd party who never bothers to check if the loans are any good, because THEY bundle it up and sell it off ASAP to a 4th party. Repeat ad nauseum.
End result is that nobody in the chain is ever incentivized to actually check if the borrower can afford the loan they've been given. On one side, you've got a giant billion-dollar industry who whose best interests are served by issuing as many loans issued as without concern for the long-term consequences. On the other, you have the borrower. As we learned from the 2008 crisis, putting all the pressure solely on the borrower to think of the long-term consequences is not only unfair, it's dangerous to everyone.