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No down, no doc loans were rare even at the height of the easy money mortgage period, and required credit scores over 680. They were NOT being given to people that didn’t pay their bills.

There are two different forces at work here.

One are subprime loans. Some were “stated income” but they still had to have verifiable employment, even if not proving income. These were for borrowers with average to poor credit, and understandably became an issue, mainly for ARM loans that adjusted 3 points upwards after 24 or 36 months. Mainly they are a problem because the people could only barely afford the payment prior to adjustment.

Next are “no doc” Alt-A loans. A different animal. Here, credit has to be good, but there is generally NO proof even of employment, let alone income. Defaults on these have still not been as high as for the first type I explained.

I have to laugh at some of the mortgage ads I hear on the radio. One company (that has the letters Q and L in its name) advertises rates “near historic lows” around 5 3/4%. Then, towards the end of the ad, you hear the APR is actually around 7.5%. This rate difference isn’t a bait-and-switch, but probably due to the fees associated with the loan (e.g., points). I always wondered how long it would take mortgage companies to wake up to the fact that the average American worker moves once every five years. With that kind of built-in turnover, mortgage companies push the return from the loan into the closing costs because they know that most people never hold their loans to maturity. In essence, these high-point loans front-load the profits and rely on mortgage turnover to keep their profits rolling in. Too many people look at the “teaser rate” and pay far too little attention to the APR of the loan.

One more thing: Don't expect your mortgage company to inform you when your loan-to-value ratio falls below 80%. When that happens, most loans allow you to drop your credit life insurance that is often tacked onto your loan. The bank gets a cut of this premium and it is some of the most expensive insurance on the planet. When I was buying some investment property, the lender told me I had to have mortgage insurance because I was putting less than 20% down. I said: "Fine. I'll find my own insurance company and make you the beneficiary." In a surprise move, they more or less said forget it...probably because they weren't going to get their slice of the premium.