New Century Signed Contracts Limiting Number of "Bad Loan" Rejections
An NPR report on the mortgage crisis detailed how investment banks willingly and knowingly accepted bad loans--to the extent that they had hard numbers on what to accept and what to reject. Economist Dean Baker has the gory details:
According to its report, one investment bank had a contract with New Century, a leading issuer of subprime debt, that it would reject no more than 2.5 percent of its loans. Of course, such a contract would be an invitation to submit bad loans.
With the 2.5 percent cap, it would have been easy for New Century to push through bad loans along with good ones, knowing that any investment bank would stop rejecting any loans past this point. The profits to be had from selling these bundled mortgages overshadowed any caution that might have helped restrained this epidemic; in fact, New Century and its investment partners not only condoned, it seems, but actively encouraged these bad mortgage loans.
Much more on the foreclosure crisis is available at Total Bankruptcy, including a helpful predatory lending glossary.