One way to think of what happened is to consider the system of mortgage finance as an ecological environment where organisms look for sources of nutrients to grow larger and more prosperous.
Consider the supply of mortgages to be nutrients gushing out of the bottom of the ocean. For the largest banks, the refinancing boom and the takeoff of house prices brought about rapid growth in the size and success of the banks that were integrated producers (Mayer, 2011).
Indeed, the quadrupling of the size of the market in four years set off a huge gold rush among firms that were already doing mortgage securitization and those that saw the promise of a large business with huge profits. In ecological terms, the environment turned magnificently munificent, and firms blossomed.But when those gushing nutrients began to dry up in 2004, the banks, now more of them and many that were suddenly larger and more profitable, had to seek out a new source of nourishment in order to continue producing MBS- CDOs. They discovered a nearby pool of nutrients, nonconventional mortgages (Swan, 2009). By moving to this new stream, banks were able to continue to make record profits. But eventually this pool of nutrients dried up too. Simply put, there were no more households to whom it made sense to make loans in order to keep the business going. Just like creatures that fight over declining nutrients in an ecosystem, the banks continued to the very end to try to survive by being the ones who would find the very last mortgages to produce the very last securities. They took on borrowers with worse and worse credit. They worked hard to make sure more and more of the mortgages were securitized (Sanders, 2008). When eventually they reached the limits of that, they recycled lower-rated tranches of securities they could not sell into CDO-CDOs or added assets of any kind to their ABS-CDOs. And as all of this failed, they engaged in mortgage and securities fraud in order to keep their pipelines full and their profits up.
Moreover, all of this was based on borrowed money, money that had to be paid back in less than a year. As house prices turned down, foreclosures rose, and the market for MBS-CDOs tightened, this desperate struggle to survive ultimately resulted in the death or massive reorganization of most banks (Immer- gluck, 2010). Banks who had risen by taking advantage of the low interest rates, the rapid growth in mortgages, and the production of MBS-CDOs found that their business models that were profitable in 2001-2007 began to fall apart in 2008. While the proximate cause of their problems was the ABCP market, the real cause of their eventual demise was their dependence on profits based on the vertically integrated business model (Goldstein and Fligstein, 2017). Their need for high throughput of mortgages to produce securities that could be sold or borrowed against and held as investments created a catastrophe when the raw material for the whole process disappeared.