"underwater" mortgages

[Pie]

Originally Posted by xoxoxoBruce

The bankers/brokers were telling people they could buy with an ARM, then switch to a conventional mortgage when they wanted to. That was a lie that buried a lot of people, when interest rates soared.

I take exception to the characterization of bad advice as a 'lie'.

My father was an investment banker. Had 20+ years' experience in the banking system, had passed all the SEC exams, was an Exec. VP of a major US bank. Knew the system inside and out. And, if it's relevant, he had a hellaciously high IQ.

He never saw this bubble coming. He recommended we get a 5/1 ARM; he was absolutely certain that we would be able to re-fi at favorable rates. You can't argue he had an interest in screwing me (his daughter) over -- he helped us with our down payment!

Of course, we were lucky. We did re-fi in 2007, a year before the collapse. And we never had a bad debt-to-income ration (I believe our back-end ratio was never over 18.)

His advice wasn't a lie. It was short-sightedness, optimism, and a willingness to suspend belief in the primacy of gravity.

There are two classes of borrowers in trouble here:

1. Those who took on crazy levels of debt, using exotic instruments to purchase things they never had a prayer of paying for;
2. Those who bought properties with otherwise acceptable DTIs, perhaps using standard mortgages, perhaps slightly 'interesting' mortgages... who have since lost their jobs.

I know who I sympathize with, and who I would choose to 'bail out'. Of course, drawing the exact line is always difficult.