Figured It Out?
A scary thought hit me last night as I searched for clues about today's market opening. Maybe the banks are scared about the subprime mess because, in effect, most mortgages they made over the past six years are subprime loans. By this I mean that the high loan-to-value and loose credit loans were the norm, and encouraged, even for strong credit borrowers. What's the difference between a good credit borrower and a subprime borrower if both bought a house but needed an interest-only mortgage so they could afford the payments. When the mortgages reset, the payments are too high and the equity has vanished both borrowers will been in financial trouble. They will not be able to refinance and will likely give the property back to the lender. There is very little difference between these two borrowers. That is what is scaring the bankers because they know better than anyone how shaky their loans were for the past six years.