harumscarum wrote:
So if people made their house payments the system would have been fine?
I think a number of factors go into that.
For example the option ARM loans have multiple payment options, the lowest happening to be under the amount of accrued interest. Naturally people looking for the cheap way out will pay the lowest value. The remaining interest has to go somewhere, so it gets tacked onto their principle and increases the amount the borrower owes, so the slowly lose value on their homes by only paying off part of the interest (which grows as the outstanding balance grows) then a few years down the line when the option arm goes into the adjustment phase it adjusts so that the borrower has to start paying down the loan, which by this point brings the monthly loan payments so much higher than what they could afford.
They start making partial payments or skipping payments, which the lender doesn't like because they don't get paid.
Of course the mortgage brokers are long out of the picture and the banks they are dealing with have since divided up their home loan and put it into several home loan backed securities so the borrower really doesn't have a good way to renegotiate the terms of the loan to something they can actually afford.
That is only one of the bad practices that led to some of the US Mortgage mess. You can even start a home loan upside down. The down payment and fees being added onto the home loan makes the loan more than the value of the house. Starting a loan upside down is one of the worst financial mistakes you can make.