This prolly sounds callous but I am not sure I have much sympathy for anybody involved. Now there are many exceptions to the scenario I'm about to outline, but in general I think this is what we are seeing.
A couple of years ago, a person/couple with marginal credit tries to purchase a home that can't afford, rather than wait and save more money for the down, wait and try to restablish there credit, or settle for someplace less expensive, they get greedy and decide to gamble. Gamble that the housing price will continue to go up, interest rates stay down, and their income will go up to afford the higher future payments.
They go to see the friendly mortgage broker. The broker knowing, that with marginal credit, zero or small down payment, and without sufficient income to qualify for a conventional loan, he will have to get creative to earn his fee. More often than not the broker and borrower pad income, lie about the source of the down payment, and generally turn the loan application into a novel not a documentary.
You add this fudging to teaser rates, negative amortization, ballon payments etc. and you have a receipe for disaster. Now, I can understand how the average not-so-financially-astute person can be confused about variable payment loans. But every loan application has a section, in big bold letters, where you swear under penalty of perjury that everything you filled out is truthful. So when the poor 67 year old lady signs the papers saying she makes 1,500 a month in a job that she hasn't had for 10 years, not the $540 she actually gets my sympathy goes away. Of course the broker is gambling also that nobody will double check the loan figures, and he'll be long gone before the fraud is detected.
The sub-prime lender is happy to make these loans because they know they can resell the loans to greedy investors and other institutions. The greedy investors looking at 4% CD rates are happy to get 8% on sub-prime mortgage cause they think the risk of default is very low.
So we fast forward to present day. The couple finds that once the teaser rates have ended they can't make the mortgage. They can't refi because house prices have stopped going up. I don't have a lot of sympathy for them because they didn't put much down payment, they were living beyond there means, and for the most part they got to live in a nice place at virtually the same cost as rent.
The mortgage brokers are losing their jobs, while am I sure many were honest, I suspect most cut corners so no sympathy from me.
The sub-primer lenders are heading for bankruptcy, they knew what they were doing. Actually New Century Financial Chairmen Robert Cole who sold 150,000 shares @$40 last summer really knew what he was doing!.
The investor and instutitions who bought sub-prime loans at 8%+ got a lesson on the dangers of loaning money to people with bad credit. Actually probably the biggest victims are the shareholders, and the admin and support personal of the subprime lenders.
The good news is that once again we will see a widening in interest rates between those people and institutions who pay back borrowed money and those with a checkered history.
