One key factor is that many of the mortgages offered to sub-prime borrowers were relatively new creations. "The option adjustable rate mortgages and the interest-only mortgages, etc., had never really been rolled out in such volumes," says professor Raphael Bostic, director of the Master of Real Estate Development program at the University of Southern California in Los Angeles. "In particular, we had never seen how they performed in periods of [economic] stress."
As institutional investors sought to maximize their returns through these mortgage-backed securities, somehow the riskiness of lending to borrowers with less-than-stellar credit was downplayed. "Once some organizations started to have problems, all of Wall Street has said, 'Whoa, wait a minute. What have we been doing for the last couple of years?'" says Bostic, a former senior economist for the Federal Reserve Board of Governors. He says the liquidity crunch came about as a result of institutions "taking a step back" and assessing the risks they're taking on. Still, for some it was too late. According to Bloomberg's Subprime Scorecard, more than 100 mortgage companies have ceased operations or sought buyers since the start of last year.