Countrywide's Risky Mortagages May Be Ballooning Out Of Control

“Pay-option mortgages” are loans in which homeowners can choose to pay the interest or even just part of the interest on their mortgage each month. If they do this, the unpaid interest is added to the principal resulting in a mortgage that actually grows over time.

These risky (insane!) mortgages are illegal in many states, but that didn’t stop Countrywide from issuing a whole bunch of them anywhere where they could get away with it. BusinessWeek explains in an article from September 11, 2006:

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

There was plenty more going on behind the scenes they didn’t know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan’s interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they’ll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is “like the neutron bomb,” says George McCarthy, a housing economist at New York’s Ford Foundation. “It’s going to kill all the people but leave the houses standing.”

Now it looks like these mortgages may have ballooned out of control.

As of the end of December, Countrywide had nearly $29 billion in pay-option loans, with about $26 billion of the total having grown beyond their original loan amount, the company said in a filing late Friday with the Securities and Exchange Commission.

“Our borrowers’ ability to defer portions of the interest accruing on their loans may expose us to increased credit risk,” the company said. It added that its risk could be greater because the amount of deferred interest on pay-option loans was on the upswing.

The Associated Press says that the number of homeowners missing their interest-only payments is still increasing, and a staggering 81% of borrowers with these risky loans provided little or no documentation of their income.

As of the end of December, 71 percent of borrowers with pay-option loans were electing to make less than full interest payments.

Way to go Countrywide… er we mean “Bank of America.”

Countrywide sees pay-option loan risk [BusinessWeek]
(Photo:Meghann Marco)


Edit Your Comment

  1. lowlight69 says:


    how could anyone think this would be a good idea for their home?????

    doom on countrywide for even having this kind of loan. something about reaping what you “loan” comes to mind, or something similar…

  2. clickertrainer says:

    I still get weekly mailer from Countrywide trying to get my business. Oh wait, that’s because I actually pay my loan down.

  3. dualityshift says:

    @lowlight69: Never underestimate the power of stupid people in large numbers.

  4. Nytmare says:

    Sounds like everyone was relying on another party to keep the loans in check, with no one actually doing so.

  5. joeblevins says:

    Do I think this is bad idea? Sure. Do I feel the least bit sorry for the bank or the customer? Nope.. Not at all. Burn in hell. They want me to bail out the bank and the dirtbag with the low cost mortage.

  6. Anonymous says:

    Who are these idiots taking out these loans?

    Why don’t we require some basic economics education that can tip people off to these scams?

  7. moore850 says:

    I like to imagine what the meeting must have sounded like at Countrywide when they thought of this type of loan.

    “How could we make more money? I know! Let’s increase the amount people owe over time instead of decreasing it as they make payments! Brilliant!”

  8. mackenzie says:

    Going back in time, note how many economic downturns were caused by stupid lenders and stupid borrowers (case in point – black friday, 1929).

    Countrywide never fails to amaze me.

  9. laserjobs says:

    Everyone loves a free PUT option.

  10. SaveMeJeebus says:

    These are good loans if you are flipping a home and want to minimize carrying costs. That is so 2004 though.

  11. crabbyman6 says:

    This is really just greedy banks and borrowers getting what they deserve. The bank is hemorrhaging money and the borrowers are out on their butts.

  12. LadyKathryn says:

    This would be one of the many reasons that I want to rip out currently required curricula and replace it with some basic life skills.

    Yes, I loved my chemistry class and literature. But frankly, the management and leadership skills I got from being on yearbook (finances) and chior (people, time, logistics) have been way more valuable in the long run. We need to demand an understanding of basic math, I don’t care if you can understand the difference between base ten and base eight as long as you can manage your checkbook and car payment. Basic literacy and reading comprehension, public health and safety, in depth understanding of civil rights and responsibilities are also on my list. Make the other stuff available for geeks who like it, Shakespere’s fun but the application of the Constitution is more important.

    For the love of god, we have to educate people well enough to function in this world, in this society. Calculus ain’t it, folks, accounting, ethics, and civil rights is.

    Sorry, my soapbox appears to have attacked me. I need to put it away now.

  13. RagingBoehner says:

    My parents just refied with a 5/1 Payment Option ARM. They will sell the house when my brother graduates college and currently pay more toward principal on the option ARM than they did with their old 30yr fixed.

    If something comes up, they have the option to lower the payment in a rough patch, or say when the $1,200 monthly heating bill comes. Otherwise, they pay as much toward principal they can afford, and the interest amount due goes down every month, just like a fixed. I don’t see the problem here.

  14. RandoX says:

    This is called “hood rich”. The illusion that you’re doing well even though you’re broke. Just a $350 mortgage payment on a house? Sweet.

  15. Tux the Penguin says:

    I’ve finally come to the realization that the entire mess is due to pure greed on both ends. The banks had these unusual loans (ARMs, interest-only, etc) for unique and rare circumstances but found out that they actually made more money on these loans, so they shoe-horned them into normal situations that really couldn’t support them. Boom, they’re making more money!

    On the other hand, consumers/borrowers wanted a bigger house, more land, etc and didn’t want to pay as little per month as possible. So they are only looking at that line-item rather than the entire contract in full. Well, if on paper I afford the monthly payment, what else really matters? Nevermind the fact that there’s no way that paper amount is realistic…

    Are we really then surprised that this all blew up?

  16. flamincheney says:

    For every idiot who takes a loan out like this, another idiot has to offer the loan. It is a chicken/egg scenario. Both parties had to realize the absolute stupidity of what they were doing, but went ahead anyways.

    I would love to talk to the accountants who authored loans like this to ask them how they ever thought that they’d work.

  17. did they really just do this for the LOLZ? like giving the homeless guy on the corner, next to the liquor store five dollars and still thinking the money goes for food/shelter??

  18. also, how is this different from just paying rent on a place? especially if you have the lack of morality to walk away from your mortgage anyways?

  19. theblackdog says:

    I wonder if I should get my money out of Bank of America before all of these homeowners start defaulting.

  20. AMetamorphosis says:

    I am so tired of bailing out idiots that don’t have a clue as to what they sign.

    I live in a modest 2 bedroom 1 bath home because that is what I can AFFORD !

    Why must those of us that live responsibly have to time & time again bail out idiots?

  21. mackenzie says:

    @theblackdog: I’m on my way out now. Probably not a bad idea.

  22. Diet-Orange-Soda says:

    @RagingBoehner: From my understanding, it’s working for your parents because they’re being responsible with it.

  23. Illusio26 says:

    I was refing my house last year, and even though I told the broker i didn’t want a Negative Amortization loan, he kept trying to push it on me. I kept telling him it is not what I wanted, but he kept insisting this was the best program for me.

    Finally I told him to take a hike and called someone else. It just never made sense to me to loose equity in my home every month.

  24. humphrmi says:

    I was laughing when I first heard about Option ARMs two years ago, and I’m still laughing now.

  25. bsalamon says:

    oh crap…i have lots of $ in BoA

  26. bohemian says:

    But you can get a $400,000 loan for just $450 a month!

    Commercials and banner ads for this crap where everywhere. Why wasn’t anyone putting a stop to this then?

  27. A.W.E.S.O.M.-O says:

    Uh, for the entire “get my money out of BoA!” tinfoil hat brigade, you do know that your money is insured by the FDIC, right?

    You may go back to your regularly scheduled “damn no I won’t show my receipt, I have RIGHTS and we will overcome” programming.

  28. backbroken says:

    Didn’t we read this back in January? And December? And November?

    This explains why I got funny looks from my mortgage broker when I insisted on a 30 year fixed mortgage.

    Why do I get the feeling that the folks who went with one of these Option ARMs are the same folks who shop for cars based on the monthly payment.

  29. copious28 says:

    That is borderline fraud. I am sure the people that would sign on to this were either horribly mortgage ignorant or the brokers were acting in bad faith.
    This is as unscrupulous as payday loans, only its with a house.
    Oh, and on loans like these, I would totally be in for the banks reworking the loans. The losses they suffer will tell them not to be jackasses in the future.

  30. mackenzie says:

    @A.W.E.S.O.M.-O: I wrap my receipts in tinfoil, just to make sure they can’t scan them as I run out the door.

  31. fostina1 says:

    this type of loan made donald trump rich.

  32. timsgm1418 says:

    way back in the 1970’s our high school offered a Business Math class, which I took in addition to algebra. Not sure if schools still offer that, but were given fake checkbooks and bills we had to pay and a lot of different scenarios on how to handle money. We even had to figure out how interest worked. If they don’t still offer that, they should@LadyKathryn:

  33. Snarkysnake says:

    “Our borrowers’ ability to defer portions of the interest accruing on their loans may expose us to increased credit risk,” the company said.

    No Shit.

    I guess what keeps me worried about this mess is that deep in the back of my mind I just know that the only entity big enough to set things back to what passes for normal is the taxpayers. That means a bailout of some sort.A big money bailout with a vapor trail of zeroes after some big number that is decided…In congress. By lobbyists. Lobbyists for …Countrywide. Bank of America . Citigroup.

    Lets go to the “Consumerist Scoreboard” to see who wins and who loses in a bailout:

    Winners – Dumbass borrowers that signed a stupid,toxic mortgage.

    Winners- Dumbass investors and speculators that thought that loaning 100’s of thousands of $$$ to people that would actually sign a stupid,toxic mortgage was a good idea.

    Winners- Congress. Citi , Countrywide , Bank of America will take care of their friends nicely.

    Angelo Mozilo- Countrywide CEO should run a mutual fund because he wisely sold a LOT of Countrywide stock be fore it cratered.

    Losers- Everyone that acted prudently and borrowed no more than they could repay , under terms that were easy to understand.

    Losers -People that work hard for their pay that will have to pay more because of the winners above.

  34. ELC says:

    You are RIGHT on the money. The root of most of these things are a lack of appropriate education. There is NO financial education in any level of the public school system. Also, there needs to be some check on people’s greed and pride (always trying to “one up” each other). But I think financial literacy, and having to DEAL WITH THE CONSEQUENCES if you get screwed by your own actions, would go a long way to curbing those baser human traits. At least in this area.

  35. theblackdog says:

    @mackenzie: Setting your receipts on fire before leaving works very well.

  36. ellis-wyatt says:

    The on-going mortgage industry bailout that we’re told really isn’t a bailout is going to include mandatory training for all future prospective homeowners prior to being approved for home financing. Some congressman will have this item inserted into the mind boggling bailout bill that’s headed our way in the next 90 days.

    “Financing a Home 101” will be a 20 hour or so program that only “certified” trainers will be allowed to teach. Banks, realtors, brokers – they’ll all be doing them, for a fee, of course, say about $500. They’ll be making big fee income and borrowers will then be educated. The problem will be that the people offering this training will be the very people who are largely responsible for creating the current mess. But, hey, that’s how we do things here in the good old USA.

  37. SuperJdynamite says:

    @RagingBoehner: “They will sell the house when my brother graduates college… I don’t see the problem here.”

    A potential problem is that they can’t sell the house. A few years ago is was a given that you could sell pretty much any house in no time. Now it might sit on the market forever.

  38. Litmajor says:

    Don’t be too hard on these borrowers–Countrywide tried to sell one to me, and the hard sell was pretty tough to argue against in Southern California for the following reasons:
    1. We had four years in a row of unbelievable home price increases, ranging from 10 to 15%. So, it really looked as if you might never get into the market if you didn’t act fast.
    2. None of the really bad stuff–the refinancing fees, the incentives for the broker, the odds of actually paying off the mortgage–was well known at the time, and the broker certainly didn’t say anything.
    3. No one in this area was saying anything about the risk. No real estate people, no developers, no home owners, no bankers, no brokers, no one in the press, absolutely no one. I can’t think of another major area of personal finance where the system is so rigged to prevent people from getting any sound advice.

    So, what’s the real issue here? I’m hearing a lot of angry talk from people whose real estate values are going down that it’s all the fault of ignorant people who got in over their heads. OK, maybe they should have checked into the fine print more, but they’re about to be punished severely for their mistakes. My complaint is that the people who do all this for a living watched a completely corrupt system run the most important investment in the country into the ground and did nothing. Is it any surprise that mortgage brokers, who took no risk themselves, would give out self-interested and short-sighted advice? Why was there so little regulation of the market on which all other markets depend? The entire premise of reasonable regulation is that you put experts in charge of watching out for ordinary consumers. We don’t expect people to form their own Food and Drug Administration when they go to the grocery store–why do we berate them for failing to become banking experts?

    For the record, I didn’t take the bait, but mainly because the seller wouldn’t come down far enough in price. I finally had to tell the mortgage broker that I wasn’t interested under any circumstances–she was still pushing the loan, no matter what, and is still making a fine living at Countrywide pushing junk.

  39. Jaysyn was banned for: says:


    Speak for yourself, I had *2 years* of business oriented classes in highschool. Budgets, balancing checkbooks, business law, the whole nine.

  40. ChuckECheese says:

    It’s like my local check-cashing business started offering mortgages!

  41. theblackdog says:

    @A.W.E.S.O.M.-O: So what happens if they tank the day before I am supposed to get my direct deposit, will it still go through or will the computer come back and say “sorry, this bank doesn’t exist anymore”

  42. tcorbett says:

    These were not stupid loans if you understood what you were doing!! I took out four of these loans in the beginning of 04 (primary and 3 rental properties) I payed the 15yr option on my primary and then payed the interest only on two and negative am on the fourth. I was able to rent these out for more than the payments and sold two of them in the summer of 06. I was able to sell the two homes for quite a bit more than i payed and it didnt cost me a dime!! Somebody please explain to me how that is stupid?

  43. fostina1 says:

    what does this have to do with bank of america. i just bought my first house through bank of america, and they made me go to a full day course on home buying, that saved me from paying pmi insurance. i also got a fixed 6.75 percent rate b/c they said thats all i qualified for, (didnt have the option for arm, and i learned the evils of arms in that class) i had filled bankruptcy about 10 years ago, and have avoided any credit what so ever since. they said i had nothing on my credit history and still gave me a great deal.

  44. A.W.E.S.O.M.-O says:

    @theblackdog: Well first of all, the biggest bank in the country is not like a dollar store strip mall. They don’t just close and disappear. Even without capital, BoA’s operation would be extremely valuable just for its customers. Someone would buy them out before they failed and you wouldn’t even notice outside of a name change.

    Second, people have already run the banks during the Great Depression so now we have deposit insurance. The FDIC will reimburse any deposits that you lose should a bank fail.

  45. WayDownRiver says:

    @AMetamorphosis and others with similar views as “I am so tired of bailing out idiots that don’t have a clue as to what they sign.”

    I’d love to hear some examples of the times you’ve bailed these people out. There’s a lot of this sentiment going around, but I don’t see much difference between this and those boobs, back in the glory Reagan years, who were tired of subsidizing welfare queens who paid for their vodka with food stamps.

    Examples please! Most of us agree these were bad loans, but let’s hear those examples where you’ve had to bail the borrowers out.

  46. A.W.E.S.O.M.-O says:

    @A.W.E.S.O.M.-O: That should be dollar store in a strip mall.

  47. loganmo says:

    Savemejebus is right, in my view. And more generally speaking, at a time when the real estate market was hot, this and other non-traditional loan products, made perfect sense for quick-turnaround real estate investors. That is until idiot borrorwers used these to take on risk that they could not possibly ever absorb to pay for homes that, based on their income and credit situation, that they just did not deserve to have.

  48. bigduke says:


    I agree completely. I see so many comments on this site railing on people for being “stupid” to sign these deals. Your average home buyer goes through the experience two or three times in his or her lifetime. The people in the industry see hundreds and thousands of loans. They should have known better! They only saw dollar signs.

    The CEO of Countrywide walked out the door with over 400 million out of this mess, which makes the 37.5 mil he got shamed into giving back not so bad. This one man alone took 1/3 of a BILLION dollars out of the system.

    But go ahead, you smart guys keep telling me about how the “stupid borrower” is the bad guy that is gonna ruin it for the rest of us…

  49. rufus1001 says:

    Please keep in mind that Countrywide, their accountants, their brokers, etc., did NOT invent this type of loan. All they did was sell it more effectively than everyone else. Don’t blame the messengers who delivered the product — blame the Wall Street investors and the securitization firms and the bond-ratings companies for allowing this market to exist in the first place. Even “greedy” brokers and lenders can’t sell products that don’t exist.

  50. Orv says:

    Prepayment penalties are evil. They’re the worst kind of punitive lock-in.

    At one point Countrywide probably could have avoided a lot of this by waiving their prepayment penalties so people could refinance. Now it’s too late; there’s no longer any credit available for those people.

  51. Jon Mason says:

    @nytmare: But…but…but the free market works!

  52. FightOnTrojans says:

    Ok, I gotta chime in now. Hello, nice to meet you, I am on of those “idiots” that got one of these option ARMs. Here’s my story: I live in the LA area, and, as mentioned previously, the rapid run-up in prices in the area scared me. My family lives in the area. My in-laws live in the area. I didn’t want to have to move to the desert to find someplace affordable. At the time, I was making about 40K a year, and my wife’s income was negligible. We were both full-time students and full-time parents in a 1-bedroom apartment. We would both be graduating in a little over a year. We had talked about buying a home, but knew we wouldn’t ever find anything in the area within our price range, and even if we did, we didn’t think we’d ever qualify for a loan. Well, one day, my parents’ neighbor tells them that they are going to be selling their house. Homes in my parents’ neighborhood were going for $500K easy. She agreed to sell it to me for $270K (it was definitely a fixer). According to the WaMu loan rep, the option ARM was the only one we qualified for (even with 30K down), and knowing little about the mortgage industry (no excuse, I should have researched more), we took her word for it. I should have known better, however, when I noticed that she was fudging the numbers on my income and she flat-out told me she was so I could get the loan. But I was caught up in the “we have to have a home, and this was our last chance before all homes cost 750K minimum” hysteria.

    I’ll be honest, it was touch and go there for a while, even with payments at the lowest level. Thankfully, we weren’t too proud to ask for help when we needed it and got through it. We’ve never been late with our payments, and now we are getting ready to refi since our income has substantially increased (since we both graduated and got better jobs) and we hope that our credit score has improved significantly with our payment history.

    We were lucky. We were able to purchase a home at a semi-reasonable price, so, even with the downturn in the market, we could still sell it. The median price in our neighborhood ($450K) is far above what I owe on it ($250K) so I could underprice the competition and sell quickly if I needed to.

    So, yes, it probably wasn’t the best thing in the world to take this loan. I went in with eyes wide open and some reservations, but, personally, giving the home up to foreclosure was never an option. It worked for me, and nobody is bailing me out. My next loan, though, will be a 30yr. fixed. I’ve learned my lesson.

  53. backbroken says:

    I disagree with everyone who thinks it’s a matter of education. I think we are in this mess because of greed. Greed by the lenders who misrepresented and/or pushed risky loans on people for a quick buck. And greed by people for trying to get something for nothing.

    No amount of education can counteract greed.

  54. B says:

    @fostina1: Hey, I got an idea. Let’s make Donald Trump bail out all the subprime mortgagees. That should solve the problem, and have the added effect of ruining Trump financially. Then we can fire him out of a cannon, into the sun.

  55. econobiker says:


    So did the WaMu loan rep keep her job by fudging more than just your numbers? She got the loan and whatever award for selling the most loans that month/year or the free trip to Cancun. She really didn’t care about the potential issues if you had not been able to make it. And you would not have been able to sue her as she is probably long gone now or would claim you lied to her for the loan…

  56. Trai_Dep says:

    @LadyKathryn: Well, don’t worry. Thanks to No Child Left behind, both the life-studies and the comprehensive education type classes are nuked. But on the bright side, BOY can our kids answer some multiple-choice questions.

    Republicans hate children. There’s no other explanation for it.

  57. FightOnTrojans says:

    @econobiker: I don’t know if she kept her job or what she’s doing now. Like I implied earlier, I don’t believe that anyone else is responsible for my mortgage situation other than my wife and I. She told us what our loan entailed, and I took it knowing what could happen. Like I said, we were lucky in some ways.

    Luck had nothing to do with us studying our assess off and graduating and finding jobs and being otherwise responsible with our debts and not refi’ing the hell out of our home so that what we owed would always be far enough below the value of our home that we could sell and pay everyone off and still have something left over. I see what the cash-out refis are doing to people now, and I want no part of that.

    Did she make a ton of money off me? Maybe, most likely, yeah. Have I learned? Hell yeah. I’m just glad I’m learning the lesson without the credit score-impacting situations others are experiencing.

  58. Ima says:

    I used to be a mortgage loan officer. Once, when I was looking for a new ‘boiler room’…I mean, ‘shop’ to work for…I interviewed with over a dozen mortgage brokers. I cannot tell you how many times I was told that their basic sales plan was to use Option ARMs and sell the $#*! out of them. I blame sleazy brokers, ignorant consumers and greedy lenders for this mess.

  59. OneLoved says:

    I worked in the mortgage industry (on the back end, at a title company) for years. Because of this, I knew a lot more about mortgages and the way loan officers and brokers work than an average person would. I worked closely with Full Spectrum, which a subsidary of Countrywide specifically for borrowers with bad credit. It was unreal what kind of borrowers were getting these loans. People that owed thousands and thousands of dollars worth of debt, people that were in the middle of bankruptcies or foreclosures…. Didn’t matter, Countrywide could get you a mortgage!

    They were a joke. I urged friends and family to never use them. We didn’t, and we have a 30 year fixed at 5.25%. We’re young, but we still bought a house we could afford. Our house is the size of a shoebox, but we never have to worry because we know we can afford it no matter what. * (hopefully)

    I blame the banks more than the borrowers, I know how high pressure and intense those loan officers and brokers are. It can be very confusing to someone not used to the process.

    But then, I would also think that when making an investment as large as buying a home, you want to research as much as possible…. Some people didn’t, and some people did and still got stuck with an ARM.

    Doesn’t change the fact that a whole lot of greed was involved.

  60. JeffCarr says:

    I am all for blaming people when they make mistakes, but I’ll agree that the going ‘wisdom’ not very long ago was that house prices were going to rise like this indefinitely.

    I had many arguments with my parents and my friends trying to tell them that any rate of growth in housing prices greater than the increase in salary rates is not sustainable in the long run, and a growth rate much higher, like we had, wasn’t sustainable even in the short run. If housing prices increased at a greater rate, eventually the median price would reach the point where a monthly payment would be more than the median family can afford to buy a house… at that point housing prices *must* drop unless there is a housing shortage. But at those prices compared to salaries, building is cheap, and new housing would be plentiful.

    However, I had a very hard time finding anyone who wouldn’t just repeat blindly that the news said that housing prices were going to keep going up…

  61. Canoehead says:

    You know, interest-only loans are not really all bad, as long as you can afford them. When I bought my place I didn’t have a ton of money to put down, so I got an interest-only 30 year fixed for 80% of the home purchase price, a 15 year amortizing ARM for the other 10% and put 10% down. I just look at the main morgage as fully tax deductible rent. The ARM is now 2/3 paid off and I should be clear next January. I don’t plan to be in the place for more than 5 years and the amount of principal that gets paid on a 30 year amortizing mortgage in the first few years is pretty negligible. I just make sure that I am saving at least as much as I would be paying in interest. I guess my point is that there is a real use for these products, as long as you use them properly and don’t simply use it as a means to over-leverage yourself.

  62. Canoehead says:

    @JeffCarr: “unless there is a housing shortage” – interesting choice of words. In many of the big coastal cities there is definitely an artificial land shortage, which creates an artificial shortage of housing. There is of course a real shortage, in that they ain’t making any more land, but various zoning restrictions, land use regs etc have resulted in a nasty exacerbation effect, and I think that this artificial shortage was a big factor in just how far into the stupid zone housing prices got. When one starts to contemplate a 1.5 hour each way commute, anything closer tends to look good no matter how small and over-priced.

  63. Orv says:

    @JeffCarr: Yeah, and 10 years ago the going ‘wisdom’ was that tech stocks would rise forever. It kind of surprises me that as a society we apparently learned nothing from the collapse of that bubble, or at least didn’t apply that knowledge to the next one.

  64. Ass_Cobra says:


    I’m glad that things worked out for you but it is this mentality, the “I am entitled to own a home despite the fact I can’t afford it without creative financing and creatively accounting for my income” menatlity, which has caused so many of these problems.

    You don’t want to have to move to the desert because houses near your parents are appreciating at 15% per year. Well don’t have kids, don’t hang out in school. I mean one of the tradeoffs of school is the opportunity cost of not working full time. One of the tradeoffs of having kids before you are financially stable is forgoing things you otherwise would have.

    As I said, I’m glad things worked out for you. I wouldn’t call it luck. Knowing what you were getting into and how you planned on getting out of it (a better job with your better education) were crucial. However the idea of someone in school with at least one kid and limited income qualifying to repay a nearly 300K mortgage boggles my mind. Maybe it was cheaper than renting but yikes a mortage is supposed to finance a house, not a dream.

  65. TMurphy says:

    The government has to notice things like this that are certain to be a lose-lose situation in the end, and stop them before they start. Maybe there should be more general legislation against ‘malicious’ business practices, allowing the government to identify offending actions as they crop up and take action, rather than needing to see what new evil businesses have cooked up, then writing the laws 6 years later. The problem, though, would be possible abuse of any ambiguous wording.

  66. pmj says:

    I agree with SkokieGuy. Otherwise, mark my words, this WILL take our stock market and whole economy down. Just look at how the stock market responds when there’s even a hint that a bond insurer might not go out of business (shoots up). This is the real fear. None of the big money pros knows how the hell this is going to get fixed. That’s why the smart money is all selling U.S. stocks short and buying commodities. And, it better get fixed fast because we live in a speed of thought world. It’s easy to blame the borrower, but the mortgage lenders deserve some of the blame, and therefore should suffer, too. They’re like drug pushers to credit addicts. And, face it, we live in a country full of addiction– whether it’s to the computer, the t.v., shopping (hence, credit), porn, whatever. Our entire advertising industry and, gulp, economy seems co-dependent upon our credit (and otherwise-) addicted culture. Pretty scary. Pass a law converting all payment option arms to 30 year balloon mortgages, with interest rates fixed at the pre-reset rate. Practically speaking, these people, the vast majority, will have no equity left, if they have any left now, the banks are stuck with lower interest payments than they bargained for– but that’s justice since they pushed these unrealistic p.o.a.s in the first place– and the economy is (hopefully) saved from an unmitigated and unending rash of bankrupted mortgage companies, foreclosed homes, ghost towns and “for sale” signs, and a complete stock market meltdown. Let’s beat the money pros at their own game by showing them we’re smarter than they think we are, keep our U.S. common stocks, and FIX THIS NOW.

  67. Erwos says:

    Tighter lending standards would be a solution I could get behind. I’m not even talking about restricting ARMs or other exotic mortgages – just make sure that everyone understands what they’re getting into. That would include the buyer not lying about their income, the banks fully explaining how the loan works, and then VERIFYING that knowledge.

    A bunch of entities (banks, lenders, borrowers, brokers, real estate agents) got greedy and took a huge gamble. Their gamble failed, and now they’re screwed. I don’t see the reason to bail them out – if the gamble had succeeded, would I have seen any of the profits? No? Then why should I share the losses?

    And I don’t buy the argument of “it’ll hurt the economy more to not bail them out”. A functioning economy needs risk to be commensurate with reward. When you distort that relationship, you’re going to cause even more bad behavior in the future. Pay a dollar today, or a hundred tomorrow. Your choice.

  68. t-r0y says:

    @Trai_Dep: Politicians hate children. (No money, no vote).

    There, fixed that for you.

  69. ChuckECheese says:

    @Orv: Look out for the next bubble sequel: Corn and wheat. Except this time, people won’t just go broke, they’ll go hungry. Sorta reminds me of Revelation 6:6. Until biofuels, I always wondered how you could have a famine where only grains were affected, but not the other stuff.