“The problem was that even though housing prices were going through the roof, people weren’t making any more money. From 2000 to 2007, the median household income stayed flat. And so the more prices rose, the more tenuous the whole thing became. No matter how lax lending standards got, no matter how many exotic mortgage products were created to shoehorn people into homes they couldn’t possibly afford, no matter what the mortgage machine tried, the people just couldn’t swing it.
By late 2006, the average home cost nearly four times what the average family made. Historically it was between two and three times. And mortgage lenders noticed something that they’d almost never seen before. People would close on a house, sign all the mortgage papers, and then default on their very first payment. No loss of a job, no medical emergency, they were underwater before they even started. And although no one could really hear it, that was probably the moment when one of the biggest speculative bubbles in American history popped.
Strangely, the first people in the mortgage-backed security chain who noticed, were the ones near the top. The people on Wall Street, like Mike Francis. He can remember almost to the day”:
“It would be somewhere around Halloween of 2006. We started seeing our securities that were 6, 7, 8 months old start to perform poorly. We started to dig into the details. Wow, property values stopped increasing. Something is turning around bad here. What do we do?”