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Originally Posted by docicu3
Not that I am a complete simpleton but exactly what constitutes a bogus or fraudulent mortgage contract and how do they benefit a bank. If you can't pay for the damn thing doesn't it end up as bad debt for the bank. What's the deal here??
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An even simpler explanation is the reward was completely separated from the risk. Wall St. was compensated (rewarded) by the transaction (bundling and selling pools of loans - MBS) but held little to no risk. They just kept getting paid on the transaction. The risk was spread throughout the economy by the institutions that purchased the product (MBS). Which is, in part, why this housing crisis is roiling the U.S. and, arguably, the international economy. Once again, the Coase theorum on transaction costs proves correct, i.e. the greater the transaction costs the more inefficient the outcome. I'd say it is all pretty inefficient right about now.