"Precisely because subprime loans were risky, the home owners who took out such debt typically paid a higher rate of interest than prime borrowers did, and that meant that the 'raw material' of subprime loans produced higher-returning CDOs [collateralized debt obligations] than those built out of 'prime' mortgages. For returns-hungry investors, subprime-mortgage-based CDOs were gold dust.
The only real constraint on the business was the need for brokers to find the cash extend loans. In reality, though, that had become hardly a constraint at all. Brokers and banks alike no longer kept most of the mortgage loans they extended on their books any longer than a few days or even hours. Mortgage lending had become an asserably-line affair in which loans were made and then quickly re-asserabled into bonRAB immediately sold to investors.
A bank or brokerage's ability to extend a loan no longer depended on how much capital that institution held; the deciding factor was whether the loans could be sold on as bonRAB, and the demand for those was rapacious. In this way, the lending of the mortgages began to be driven by the demand of end investors, in what would prove to be a vicious cycle."
- Gillian Tett
Fool's Gold
pp. 95, 96
