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In other words, half of the subprime originations were people who couldn't pay the old mortgage, getting *paid* by the bank, to take out a *bigger* mortgage. The "paid" part could then be used to stay current on the next few mortgage payments. This means the banks were throwing good money after bad, and avoiding an event of default by loaning more and more to their deadbeat borrowers. Why were they doing this? Because they believed higher house prices would save the day, even for deadbeat borrowers who could not afford their smaller, older mortgages. They were engaged in a greater fool theory trade - they expected the borrowers to ride house prices ever higher, even without being able to pay the interest, and to pay said interest *out of* the house price appreciation.

This is exactly what happened to my 36-year-old son. It was his 3rd house in 5 years. His present Las Vegas house (the one he is now losing) was worth $486,000. He had paid $386,000 a year earlier, while it was being built. He said, "Dad, this capitalism thing is fun!" I said, "Son, don't take that ARM second mtge. It'll bite ya." He said, "Awwwww, we're only gonna hold it 4 years, then flip it". Instead, he took a house in a state where prices (and crime) are much lower, to raise his family. The housing market went south in Vegas, and he is way upside-down on the Vegas house and can't sell it. He is losing it, and his credit rating for the next 7 years, and will be hit with an enormous IRS bill. That, in microcosm, is the nature of this beast.

If I understand your story correctly, it sounds like he bought House #2 before he sold House #1 (the one in Las Vegas).

This was an enormous risk that ultimately ruined him financially -- even more so than taking out a large mortgage on the Las Vegas home.

Fortunately, it sounds like he's at least got some time to repair his credit record -- and has another home in which to live.

Bush and the rats have both proposed tax-free status for loan forgiveness. I understand how loan forgiveness could be used to avoid taxes. In situations in which someone loses a home, it seems ridiculous to consider loan forgiveness as taxable income. Your son may avoid a tax bill if he can postpone the default until next year.

“Dad, this capitalism thing is fun!” I said, “Son, don’t take that ARM second mtge. It’ll bite ya.”

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Real estate prices in my county never reached the level of some areas but did rise above the national average. We are now hearing some reports of defaults in South Carolina. I was struck back in ‘01 by the amazing number of oversized McMansions going up just across the county line from me. We have two county seats here within ten miles of each other. I remember talking to people in the business who told me that most of those big houses were being built by two income couples who just barely qualified for the mortgage and would have no money left for maintenance or any kind of emergencies. It is amazing how many people want to live right on the edge of financial disaster. I have simply never been able to understand what satisfaction is derived from living in a huge house that you cannot actually afford and having no money left over for anything else.