Why Mortgages Blew Up

http://www.thestreet.com/s/why-mortgages-blew-up/newsanalysis/realestate/10374658.html?puc=_dm ^ | 8-16-07 | Simon Constable

[Hydroshock]

Many homebuyers in recent years took out exotic mortgages that ultimately backfired. This raises the question of why such booby-trapped financing was available at all.

Fisher Investments Charles Schwab

TD AMERITRADE Options House

Zecco.com Fidelity Investments

The answer, in part, stems from overaggressive marketing of what were once niche products intended only for the most financially sophisticated and creditworthy customers. During the housing boom in recent years, banks began offering such elaborate loans to huge numbers of average homebuyers, allowing them to get in over their heads and contributing to the current mortgage crisis, as many borrowers ended up defaulting.

Last week, TheStreet.com reported that several of nation's largest lenders, such as Countrywide Financial (CFC - Cramer's Take - Stockpickr - Rating), were still offering the types of loans at the center of the current meltdown in the subprime mortgage market. That's despite the fact that the company has taken a beating on the stock price, down about 40% over the past month, and some of the loans offered seem doomed to fail from the outset.

The most exotic product, the option ARM (adjustable-rate mortgage), or negative amortization loan, allows the borrower the choice of paying a minimum amount that might not even cover the interest on the loan.

If that alternative is taken, the shortfall is added to the loan balance, and so the borrower gets further and further into debt over time. Such loans are inherently risky for the debtor and the lender as well. Another risky type of loan is the interest-only mortgage. The balance on an interest-only loan doesn't increase over time, but it doesn't decrease either. The borrower is essentially just treading water.

[Pelham]

If the Fed is confronted with the pushing-on-a-string dilemma rate cuts may not even postpone the damage. The Fed can offer cheap money but in some cases banks won’t try to lend it.

[whitedog57]

Interesting story on bankrate.com

Freeper quoted in article!

http://www.bankrate.com/brm/news/mortgages/home-values1.asp?caret=1

[BlabItGrabIt]

Big lenders that funded the Countrywides are refusing to buy more American mortgage paper

Until.........someone cuts rates. Not complicated.

[M. Espinola]

"And I wanted to note, that Ex-Texan has predicted all of these, for several years, on this forum, perfectly accurately. Many people appreciated the tip - but some gave nothing but abuse and complaints toward Ex-Texan, who was telling them common-sense that they didn’t want to hear. I hope they are wiser now."

I am in total agreement with your overview of Ex-Texan's repeated warnings over the last few years concerning future, major market problems, triggered by the economically dangerous subprime banking loan schemes.

In terms of those dishonest, commission greedy, lurking parrots for the real-estate & banking industry which viciously mocked, hacked and feebly attempted to discredit every warning Ex-Texan issued about the pending issues which evolved into today's market realities - what do you state now?

To the previously exposed cyber subprime loan racketeers who still lurk on here, come out and state,, as you did before that the following headlines are 'all lies', ' it's all nonsense', 'just keep flipping houses' and 'it will never happen'.......

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[Grampa Dave]

“In the scramble for liquidity everything gets sold, including gold. Cash is king in a credit crunch.”

Thanks for that excellent reminder. Gold/silver index is down again this morning.

I think that we will see these scrambles going on for years. A couple of weeks ago, my wife went to lunch with a group of women (they and their husbands should know better), and everyone but a real estate broker and my wife had huge interest only loans. The husbands and often the wives have good paying jobs, yet they opted for extreme luxuries now. Luxuries like 100,000 $ kitchens, $30 to 50k outside cooking/dining areas,new BMers, Mercs, Lincoln Navigators, 25,000 $ Rolex’s, long cruises on the QE2 in suites and on and on.

The adjustable rate mortgage trap caught 3 women in my wife’s office. They and their husbands could only get interest loans, and they are sitting on time bombs.

Yesterday during a phone call to a friend in Sacramento, he is seeing the same thing in his upper blue collar neighborhood. Sac’s market is in the dumps and will stay there for awhile. New swimming pools, new carpet torn out for wooden floors or new carpet going over 2-3 year old wooden floors. Yard landscapings ripping and tearing out fairly new plants and putting in new plants, irrigation systems and expensive outdoor cooking stations and dining areas. Sac from May through Sept is often too hot to eat or cook outside.

So your cash is king scene will be repeated for years out here in Californicator.

[Pelham]

Until.........someone cuts rates. Not complicated.

Hardly. The big lenders that funded the likes of Countrywide aren't going to change their minds because of a Fed rate cut. They no longer trust the risk ratings on American mortgage paper. It's not a problem of interest rates, it's a problem of protecting capital.