Wednesday, September 27, 2006

US Housing Bubble - Economy in Denial

I'd never heard this spelled out so clearly. Why do lenders lend money to folk who can barely pay anything back, and, in fact, don't even manage to pay all the interest each month? Why, it's because each month the borrower doesn't pay all the interest, the lender can count all the interest, unpaid as well as paid, as INCOME...right up until the loan goes bad.

Asia Times Online:
Needless to say, the holders of such mortgages typically make little or no deposit. Why do lenders get engaged in this sort of activity? Partially because the promised yield is attractive and these hot potatoes can be passed on. But, and here is the scandal, the bank can also record the full interest income each month, even if the homeowner only pays a fraction; because it is part of the terms of the mortgage that the homeowner only pays a fraction of the full interest, the mortgage is considered to be in good standing and the full interest is recorded as income. Of course, the balance sheet of the bank deteriorates, but as long as Wall Street is more focused on earnings than balance sheets, this is a very attractive business.


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