02 January 2010

And checkmate

So as usual, the problem is everybody's, but we can blame it on the powerless

It makes much, much, much more sense that the problem with mortgages was adjustable rates resetting than subprime loans. It's true those NINJ loans were probably fucked up. It's true that loaning to people who didn't put money down may backfire. And it's true that a loan with a high interest rate probably doesn't work for most borrowers in the first place. But if they could afford the payment then, if it was a fixed payment it doesn't matter. They could afford it now under most circumstances. What makes far more sense when you realize the number of speculators who lost their shirts over people getting kicked out of their homes is a comparison of prime and subprime loans that shows they're basically the same rates of default loans. It's the ugly cousin in the room that nobody wants to talk about: non-traditional mortgages of that variety. There are circumstances where an ARM makes sense. That sense is partly true for someone speculating on a second property (though a straight interest-only loan rather than an ARM probably makes more sense still in that case and if it's a rental property a fixed rate is perfectly fine). We can refer to a subprime mortgage with a "balloon payment" all we want, but all that "balloon payment" really is is the rate resetting upward in an ARM. And if that's what it is, then the problem is too many people got ARMs and not enough people bought homes with a sense of the risk for themselves. That is, that interest rates would go up and that they would not be able to afford that increase, and from the perspective of banks, that most people wouldn't default because housing price increases would either allow more people to refinance out of these goofy loans or they'd allow them to sell to get out from under the payment. Neither of those models of thinking was realistic.
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