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Economic Doom Update

The first tremors in the housing market earthquake have been felt, but as I've mentioned before, this is a big mess and it's going to cause more than just a couple of down days on Wall Street.

The Washington Post had a good article yesterday on the depth of the economic foolishness that led to this state:

Today's pop quiz involves some potentially exciting new products that mortgage bankers have come up with to make homeownership a reality for cash-strapped first-time buyers.

Here goes: Which of these products do you think makes sense?

(a) The "balloon mortgage," in which the borrower pays only interest for 10 years before a big lump-sum payment is due.

(b) The "liar loan," in which the borrower is asked merely to state his annual income, without presenting any documentation.

(c) The "option ARM" loan, in which the borrower can pay less than the agreed-upon interest and principal payment, simply by adding to the outstanding balance of the loan.

(d) The "piggyback loan," in which a combination of a first and second mortgage eliminates the need for any down payment.

(e) The "teaser loan," which qualifies a borrower for a loan based on an artificially low initial interest rate, even though he or she doesn't have sufficient income to make the monthly payments when the interest rate is reset in two years.

(f) The "stretch loan," in which the borrower has to commit more than 50 percent of gross income to make the monthly payments.

(g) All of the above.

If you answered (g), congratulations! Not only do you qualify for a job as a mortgage banker, but you may also have a future as a Wall Street investment banker and a bank regulator.

No, folks, I'm not making this up. Not only has the industry embraced these "innovations," but it has also begun to combine various features into a single loan and offer it to high-risk borrowers. One cheeky lender went so far as to advertise what it dubbed its "NINJA" loan -- NINJA standing for "No Income, No Job and No Assets."

In fact, these innovative products are now so commonplace, they have been the driving force in the boom in the housing industry at least since 2005. They are a big reason why homeownership has increased from 65 percent of households to a record 69 percent. They help explain why outstanding mortgage debt has increased by $9.5 trillion in the past four years. And they are, unquestionably, a big factor behind the incredible run-up in home prices.

Now they are also a major reason the subprime mortgage market is melting down, why 1.5 million Americans may lose their homes to foreclosure and why hundreds of thousands of homes could be dumped on an already glutted market. They also represent a huge cloud hanging over Wall Street investment houses, which packaged and sold these mortgages to investors around the world.

Read the whole thing. It almost makes the dot-com insanity look respectable in comparison.

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Comments

Don't overlook credit card debt when it comes to bank-initiated insanity.

If I decide to pay only part of my balance -- in other words to use the "credit" part of my credit card -- Citibank feels free to charge interest on the entire balance. That's the paid balance as well as the unpaid.

And new charges begin accruing interest the milisecond they're incurred.

Even after I pay the whole thing -- on time -- they charge interest on the balance from between the time they sent out the bill until the time they say they received the check. Or is it the time the check clears?

Last year, I called them to pay a credit card bill in advance because I was leaving the country. Either they quoted me a balance that was two dollars too low or I sent a check that was two dollars short.

Before I was through that two dollar shortage cost me over $50 in interest.

Hey, if the bank paid ME that kind of interest on my deposits, I'd have retired at the age of 32.

Yours Crankily,
The New York Crank

Don't overlook credit card debt when it comes to bank-initiated insanity.

If I decide to pay only part of my balance -- in other words to use the "credit" part of my credit card -- Citibank feels free to charge interest on the entire balance. That's the paid balance as well as the unpaid.

And new charges begin accruing interest the milisecond they're incurred.

Even after I pay the whole thing -- on time -- they charge interest on the balance from between the time they sent out the bill until the time they say they received the check. Or is it the time the check clears?

Last year, I called them to pay a credit card bill in advance because I was leaving the country. Either they quoted me a balance that was two dollars too low or I sent a check that was two dollars short.

Before I was through that two dollar shortage cost me over $50 in interest.

Hey, if the bank paid ME that kind of interest on my deposits, I'd have retired at the age of 32.

Yours Crankily,
The New York Crank

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