Lenders Gone Wild

Bill Bonner quotes Marketwatch:

"The housing credit bubble led to the growth of exotic loans, which, in a vicious spiral, drove prices even higher," said one observer. In a bubble, "the financing gets progressively worse. At the end, you get nuttiness," said Dean Baker, an economist for the Center for Economic and Policy Research, a Washington think-tank.

"Finally, prices got so high that 'the only way people could buy houses was by bending the rules,' said Baker, who's been warning about the real-estate bubble for years. In the Orwellian parlance of the mortgage industry, loans that ignore the true ability of the borrower to pay for the loan are called "affordability" products. Most of the exotic loans have low introductory interest rates that ultimately adjust to market rates, usually after two years. Some loans require that only the interest be paid, putting off the day when the borrower must start to pay down the principal. Some of the loans allow borrowers to make a monthly payment that doesn't even cover the interest, resulting in a negative amortization when the unpaid interest charges are added to the principal. And most of such loans sold in the sub-prime market have large prepayment penalties that make it expensive to refinance."

None of this will come as news to our long-suffering readers. But it is sure to come as a shock to homeowners who haven't read us. A $200,000 ARM, for example, can rise from a $643-a-month burden in the first year to a $1,578-a-month burden in year six...by which time, the principal would have risen to $214,857, according to a MarketWatch source.

When incomes stop correlating with housing prices leverage is the only way to keep prices high.