Last week I posted about [Confusing A Housing Bubble For A Lending Bubble](http://matrix.millersamuel.com/?p=823) and how the housing boom was really caused by an erosion in underwriting quality. I suspect until we see major stats on housing price declines in some markets, we are going to see a lot more articles about mortgage lending.
Businessweek had a particularly vitriolic cover this week: How Toxic Is Your Mortgage? The cover story was called [Nightmare Mortgages](http://www.businessweek.com/magazine/content/06_37/b4000001.htm). Its a thorough piece that basically outs most creative financing. This is one of the first large scale pieces I have seen that really fleshes out exotic mortgages and shows how so many people were duped or didn’t fully realize what they were getting into.
My first thought was along the lines of: Why didn’t the borrowers take more responsibility for the process of getting a mortgage rather than simply signing on the dotted line? But in reality its hard to be that tough on someone that was misled and a victim of some type of fraud. However, I am amazed at how many people simply signed. Herd mentality rules.
My second thought was: This seems to stereotype the entire mortgage market, giving the impression that nearly every mortgage that isn’t a 30 year fixed is “toxic.” I think the reality is that exotic products are found in differing amounts in different markets and with different demographic groups. Its not a small problem, but I would guess that this article tends to exagerate how widespread the problem is.
My third thought was (ok, it was my first thought): What about all the other people that will be hurt by the falling values of properties that purchased with these products if they are foreclosed in rising numbers? The article seems to suggest there are many who are vulnerable, especially as mortgage rates reset, that this lending pattern will hurt many others indirectly.
And if all this isn’t bad enough, [Steve Irwin passed away unexpectedly [CNN]](http://edition.cnn.com/2006/WORLD/asiapcf/09/04/australia.irwin.remembered/). Crikey!
I’m a big fan of fixed income loans, I remember my mom being stuck with a really bad ARM in the 80s for a while and barely being able to afford my hockey sticks.
That’s too bad about Steve Irwin.
I think a lot of people use such kinds of toxic mortgages as a way to get onto the housing boom bandwagon. They probably didn’t care that much about the “toxicity”. Furthermore, these kind of loans are like god-send for real estate investors. If your networth is only $10K, and someone allows you to make a million dollar bet on Black or Red on roulette, won’t you give it a try? You have nothing to lose, except maybe $10K, while you can possibly get a million dollar winning.
I definitely think the whole lending system is at fault here.