Reports confirm that half of the borrowers with sub-prime loans were actually eligible for terms that would have been more beneficial for them but they were intentionally navigated into costly mortgages. In many of these household each of the parents had two jobs. When the resets, they had been made to agree to, started the borrowers began to default on rates that previously had not been heard of.

Why did not the investors down the line assess the risk of the securities they had bought? John Dugan of Controller of Currency (the entity having the responsibility of keeping sound the banking system) said, “Common sense suggests that a mortgage lender would almost always want to verify the income of a riskier sub-prime borrower. But the norm appears to be just the opposite. Nearly 50% of all the sub-prime loans last year accepted stated income”.

Thus it indicates that in contrast to the recent past lenders are not interested in verifying the income stated by the borrowers in their applications. In reality the situation is worse. The players in the sub-prime game often encouraged the loan applicants to lie!

They are advised to overstate their incomes, assets and other eligibility criteria. Some politely turned a blind eye while hurrying the borrowers to contract sub-prime deals. One sub-prime appraiser working for New Century Financial commenting on these “liar loans” to Washington Post said, “You didn’t want to turn away any loan because all hell would break loose”.

Is it then little wonder that sub-prime defaults sky rocketed? This does not mean that investors should turn away from Americans with low to moderate income wanting to buy a nest. Rather they should prudently invest in the non-profit housing sector that has a showing of negligible default numbers. Their better tract record should be rewarded with more capital expansion. The non-profit housing sector has not discarded the wisdom of traditional banking.

The purchasers are educated by them to understand the house ownership responsibilities in its entirety. The nest seekers are told to cast their eyes only on those units that they can afford. In times of trouble they are there like the family doctor to steer them through the rough patch.

Instead of forced selling they offer education to the borrowers. Instead of ballooning, the mortgages they focus on sustainability. Instead of turning a blind eye they put on spectacles and peer straight into the eyes of the borrowers.