[rconti]

1. SOME of the equity can disappear in the blink of an eye. The lender has a nice cushion when the buyer puts down 40%. That's hardly considered risky, which is why this is a terrible example.

2. Subprime refers to the class of borrower, typically based on their less-than-ideal credit scores. The term does not mean that the bank is offering a rate below the prime interest rate to "trick" potential borrowers into taking on debt.

[throwaway_law]

>The term does not mean that the bank is offering a rate below the prime interest rate to "trick" potential borrowers into taking on debt.

Its not a trick, just something the Borrower's en mass did not understand. They just understood the initial low payments, anyway as I replied above, leading to the mortgage crisis over 90% of subprime loans were ARMS that started off below prime and gradually increased. I did use the word "generally" because its not all, but I think 90%+ is a good use of generally.

[ryacko]

It is safe to say that most people don’t understand algebra.

In theory the banks didn’t put a proper interest rate on the loan, since interest rates are mainly to compensate for the risk of lending to the borrower. Although it doesn’t matter since the banks bundled the mortgages together, sold them to each other, and were bailed out.

[throwaway_law]

>It is safe to say that most people don’t understand algebra.

Yes, but most people are not entering legal agreements that require them to understand algebra. One would think, especially with the most uneducated and highest risk borrowers, it would be necessary to understand the initial payment under ARMs are temporary for 3/5 years (depending on the terms, but 3/5 year were the most common) and thereafter the monthly payments will go up (statistically by 75% - so your $1,000/month mortgage payment will go up to $1,750).

>In theory the banks didn’t put a proper interest rate on the loan

Yes, that was one part of the problem (obviously the most uneducated and riskiest borrowers should not have been eligible for these complex adjustable rate mortgages), why on Earth would the riskiest borrowers have gotten loans with temporary interest rates below prime? These were the most likely borrowers to not understand adjustable rates. Other major issues were of course stated income (no proof of income required) and 100% to even 103% financing (no downpayment, banks will even pay your closing costs).

>Although it doesn’t matter since the banks bundled the mortgages together, sold them to each other, and were bailed out.

That is exactly why it matters, because laws were passed to prevent these kinds of loans, and here we are full circle, and the banks are offering these loans again.