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 the sub prime crisis was created when the federal reserved printed up more money (called "lowering interest rates"  which fueled the malinvestment in real estate.  so the federal reserve was called upon to solve the problem by....printing more money!  It's like the scorpion who stabs the beaver or whatever it is that tries to help him across the river.  Unfotunately, these guys just have a pavlovian mindset that turns them into criminals when they have more money than they should. still,  you'd figure with all the gloom and doom in the media on the economy they would clean up their act for at least a little while.


Wachovia is still making loans called option ARMs. These loans involve an offer to a borrower to pay less per month than is required to repay the loan. Each month, the money left unpaid is added to the loan's principal. Then, at some contractual trigger price for principal, the loan's monthly payment jumps. The borrower may have to pay twice what he had been paying. He may pay even more than double.

Why would anyone agree to accept such a loan? Two reasons: (1) he expects his income to rise sharply in the next year or two; (2) he is a person who does not read or understand contracts and also believes in something for nothing. 

 

We are now in a recession. The number of people who can expect big increases in their income next year is a small and declining figure. But Wachovia is still making option mortgages.

But aren't option ARMs the most vulnerable to default of all mortgages? Yes.



 Wachovia made no bones about its desire to continue to make option ARM loans. Where? In California.

California? Where housing prices are plummeting? Yes.



The present subprime mortgage crisis has been in full swing since August, 2007. Why in March was Wachovia still making these loans – in California, Missouri, or anywhere else?

link (http://www.lewrockwell.com/north/north617.html)

Most option ARMs were taken by people who bought into the real estate koolaid that their homes will increase in value by 50% by the time the bigger payments come due, and then they upgrade to a bigger house.  You can have fun tracking the mortgages exploding on blogs like

http://www.irvinehousingblog.com/
http://housingpanic.blogspot.com/
http://www.doctorhousingbubble.com/


Prices near here are getting close to reasonable, my wife and I might be able to afford a house soon.


There are more ARM loans that will come due all year, and then other fancy types of loans will start popping in 2009.

I'm not knowledgeable about the mortagage business.  these ARM things  seem like middle class sub primes.  except they stopped doing sub primes and continue to do these.

Not quite on your topic, lester, but I'll try.

I agree that those kind of loans are unwise to offer in this present market.

I also think that it's a heterogenous group who takes ARMs and such loans.   We argue about this in my family sometimes.  Do people really understand how screwed over they could be by a variable interest rate loan when they get it?  Do people just become greedy and make a bad choice?    I think all of the above are what happen, on a really huge scale.

My wife and I paid for a small percentage of our house with a home equity line of credit with a variable rate, and when that sucker jumped two points, we poured money into it until it was gone.  Never again will I take a loan like that.  But -- we had bought a house that only costs a fraction of our income to pay for, so this wasn't a big panic for us.  We would not have agreed to buy our whole mortgage under those kinds of terms, but I can halfway sympathize with some of the people who did... especially those with marginal incomes, who are harder-hit by all the other rising costs.

Then there are the whiny-ass people making six figures who worked in lending, who are carping about how they won't be able to keep the house in Malibu, etc, yap yap yap.  If you worked in the lending industry and got laid off and couldn't see it coming, I got news for you:  we have little to no clue about the industry and we saw it coming!  So no sympathy from me -- greed pays its own dividends.

if you are buying a house these days, it is paramount to hire an attorney

I'm totally stupid about this stuff, but from what I've seen and read  in various news reports one the problems with this subprime business is that they were loaning people more than the house cost. The borrowers would then turn around and use the excess money to buy cars or other items.

The foreclosures are now happening because the rates went up and the borrower was stuck paying off a loan that is way more than the house is worth.

I feel little pity for the lenders or the borrowers in this mess, it just boils down to greed on everyone's part.

I remember when they started those ARM loans back in the 80's.  My wife and I assumed a VA loan on the first house we bought at 13.5% in 1982, the interest rate on a new VA loan would've been 16.5%.  Someone tried to talk us into one of those ARMs and thought it was a bad idea back then.

in the link, the author refers to them as 'walking backward loans".  basically, they made them to people hoping they would live in them for a while then default.



I agree about thelenders and borrowers, but when the likes of Alan Greenspan are out there telling you this is the new good way, it's no surprise many played footsoldier in this war on rationality.

Exactly.  It has nothing to do with fixed vs variable rates.  It has to do with money mismanagement, whether that money is obtained from a loan, lines of credit, writing bad checks or whatever.  It comes down to personal responsibility - people CHOSE to borrow more than they could afford; just because a lending institution offers a plan, does not mean anyone has to take it.

When we bought our current house, we only planned to be here 3 - 5 years (we are going on 6 now, but are thinking about moving in a year or so).  We got a variable rate mortgage because, due to the caps ands such, there was NO WAY we'd pay more with this loan than with a fixed rate.  And we haven't; we've paid less.

A lot of times, these things are designed for very speicific uses - like us, living in this house only for a few years (during which most of the payment is interest, not principle, though we do make principle-only payments).  If some folks, greedy as Trek said, tried to 'play the system' and live higher than their means, that's their problem.

The bad thing about this  is that we taxpayers always end up having to bail the greedy bastards out.  Remember Savings and Loan debacle when George Sr. was the president.

surprise surprise (http://www.nytimes.com/reuters/business/business-wachovia.html?_r=2&oref=slogin&oref=slogin)  the afformentioned lending entity is now bankrupt.