I haven't had much to say about mortgage markets, mainly because what is going on is so obvious and straight-forward I wouldn't have thought it needed comment. Even smart financial people get caught up in speculative bubbles, as was demonstrated in the late 1990's when they put money into some really dumb Internet investments. New credit products can be difficult to price, since much of the costs come after the initial sales are made (in the form of defaults). So some companies mispriced a new product, some others got caught up in a speculative bubble, same-old same-old. This too will pass ... unless of course the government does something really stupid like bail some of these guys out, and then it will happen over and over again because no one will have an incentive to change their behavior.
I am afraid I also don't have tons of sympathy for the borrowers. By definition, since most of these subprime loans were little or nothing down, folks are not losing their life-savings and equity, because they didn't have any equity. They are being forced to move out of their house in the same way a tenant might if he couldn't make his rent payments, except in this case the "rent" was tax-deductable. I do feel some sympathy for consumer borrowers who were enticed into borrowing against their home rather than through some sort of consumer loan, thus endangering their house to buy that big screen TV. But who did the enticing - wasn't it the government, who provides a huge subsidy for home equity lending (via the mortgage interest deductibility on income taxes) versus other forms of borrowing?
But here is the amazing thing to me: the same politicians who demagogue payday loan companies for providing loans that are too expensive can simultaneously demagogue subprime lenders for loans that were too cheap. They criticize the same banks now for being too free with credit to the poor that they have criticized for years (via redlining suits and such) for being too stingy with credit to the poor.
It's almost as if politicians don't really care what lenders are doing, they just want to find an excuse to get a few sound-bites on the local news back in their district and issue some legislation to expand federal power in the banking industry.