Financial Unconsciousness in American Financial System Essay

Incompetent commission structure at mortgage brokers brought in homeowners who had initially been shut out since they were not bankable and lowered lending standards. This led to growth in housing and, consequently rise in house prices, thus reclaiming mortgages that were on the verge of defaulting and lowering default rates. Incautious banks were convinced by these new developments and assumed that the lending was safe without considering conducting a background check on the financial capability of the borrowers. Regulators made no effort to warn or stop the banks but allowed them to continue offering mortgages, thus posing an enormous financial risk. Ineffective regulation of banks and other financial institutions by the relevant authorities created an opportunity for lax financial regulation. The scheme by mortgage brokers to lower default rates and consequent house financing by banks led to asset price bubbles. Moreover, the failure of banks to conduct a financial background check on borrowers and over-reliance on mortgage brokers’ information on issuing any mortgages led to astounding underwriting standards leading to massive losses.