In retrospect, it is easy to understand the short-term allure of securities backed by subprime and alt-A mortgages. The rapid rise in housing prices between the years 2000 and 2005 meant that even high-risk borrowers could be expected to profit on the resale of their homes, reducing the danger of losses through foreclosure.
However, banks and financial institutions understood that there were great dangers in securities backed by such loans as well. Given the historic cyclicality of the housing market, the window in which such loans might be profitable was likely to be limited. Moreover, as more higher-risk loans were written, the quality of borrowers steadily declined and the chance of default rose dramatically.
