[VRM]

A friend of mine got ARMed. He signed up for one of those crazy mortgage deals that he saw on TV or someplace. He told me about it as he was about halfway through the process. I told him he should back out of it and lock in a good rate (this was about 4 years ago). He said that his credit was not that great. Well, fast forward - he took out a bunch of equity to buy a new truck, a new car, and also to remodel his house. He seems to buy (not lease) a new car every 2-3 years. Then the rate started to go up. He would have lost his house if his dad had not paid off his truck, car, and credit card bills for him.

The whole thing is his own fault for not living within his means, and for not understanding the mortgage plan that he was getting into. Unfortunately, there are lots of people just like him. They started to see dollar signs (and flat screen TVs) when lenders told them that they did not have to pay for the principal for a few years, or that they could use their home equity to buy all those things that they 'need'. Lenders also have a responsibility to write loans that stand a good chance of running to term.

There is plenty of blame to go around, but that is not going to fix the problem. I'm not a banker, and I know that the issue is more complex than my understanding of it, but where is that breaking point between rewriting the note for an rate that the lender can afford for the duration of the note and the costs involved in forclosure? In this market there are just not going to be that many people able to buy all the homes being forclosed on, so what are the lenders going to do with them? With the value of the homes being a lot less the lenders will take a (sometimes substantial) hit there as well when they try to resell.

I might be wrong, but it just seems to me that it would be better to make a smaller profit on someone paying a loan properly than to end up with extra costs associated with forclosure and resale.

Steve