it’s become more expensive to process loans that default. While banks typically sell to other investors the mortgages they make, they often hold onto what’s known as the mortgage “servicing”—that is, the process of collecting loan payments on behalf of investors. Because the foreclosure crisis has led to higher costs associated with servicing delinquent loans, the easiest way to avoid against having to service a defaulted loan, of course, is to make risk-free loans.
The “foreclosure crisis” is the huge outcry against foreclosures, which caused politicians to impose all sorts of new procedures and fines against mortgage servicers. As a result, nobody wants to service anything other than a squeaky-clean loan. I’ve tried to explain the economics of mortgage servicing in testimony on the Hill and in my housing finance course for MRuniversity.