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Here is a stat you rarely see - half of all subprime mortgages in the middle "oughts" were for cash-out refinancings.

Ok, what does that mean? First, a cash out refinancing means the person already had a mortgage, and took out a new one to pay the old one off in full - and took some money out, as well. Rather than paying down, this means the mortgaged amount increased - it was for more than the old mortgage or was used as a way of taking out some of the home equity.

But what a second - what makes a mortgage subprime to begin with? Poor credit for the borrower. OK, what is the leading cause of that poor credit, present in nearly every case? A missed mortgage payment, frequently 2 or 3 in the previous year.

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.

And eventually to sell at a big fancy price, and pay off the loan in full.

OK, sell to whom?

Crickets chirp. And here we are.

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.