With the recent decline of the stock market the news has been charging the subprime mortgages as the reason. They have lashed out with remarks such as, “those people should have never been a homeowners anyway” or “only the unworthy are in danger of losing their homes.” While I can understand the woes and emotions of the markets losses, is it really the borrowers who are to blame?
When I got my loan on my house, the lender was pressuring me to get an ARM (adjustable rate mortgage). I would have saved either a half or three quarters of a point on the loan at the time, I can't recall. I was resistant and mentioned to the young lady, “you may not realize this, but in the 80s rates were 15% and up and that's not a risk I'm willing to take” she replied, “rates will NEVER go that high again.” I mentioned, “if it can happen once, it can happen again.” I got a fixed 30 year rate, but I understood her reasoning for wanting me to have the ARM. Loan officers are paid better on ARMs, at least that was what I understood when I worked for a mortgage company and banks in the past. She of course, didn't know I had that background. Additionally, my parents once owned an ARM and their payment was continuously going up, so why would I want that?
Secondly, banks have greatly lowered their standards for qualifying borrowers. When I worked in the business, the standard rule of thumb to qualify was 28% of your gross income was used and your current debts were subtracted from the 28%, whatever was leftover was used to calculate the payment you could afford. If you had A+ credit you might be able to use 36% of your gross income. For example, if I earned $54,000 a year and had average credit, $15,000 a year or $1,250 a month could be used for my debt. Then I had to subtract any other debt, property tax and homeowners insurance from the $1,250. So, if I had a $250 car payment, $150 in credit card payments, property tax and insurance of $150 a month, I was left with $700 a month that could go to my mortgage payment. Then depending on the interest rate, I know how much I can borrow. 5% would mean I could have borrowed about $140,000, but if the interest was 10%, I could only get about $70,000. More recently when I got a loan for my house the income to debt ratio was 50% of my income. This was for average credit. That's almost twice the norm of 20 years ago. The same example above using 50% would have allowed me to apply $2,250 a month to my debt, minus the above monthly debts, leaving $1,700. I could borrow about $300,000 at 5% or $140,000 at 10%. This of course would effect the property tax and insurance, thus lowering the borrowable amount slightly. An additional negative, the cost of living is more now than when I worked in the business. The dollar today buys less than it did then, which makes the 50% ratio compound it's affect.
Thirdly, I understand the mortgage business and I knew that any ARM is a high risk compared to a fixed rate, but the average consumer doesn't understand this. They are at the mercy of the loan officer and would have believed his pitch and taken the ARM. The simple truth is that banks make more profit with an ARM so they push them more. Banks don't care about what's best for the consumer, they care about their bottom line. Sadly the banks won't suffer for their trickery because the government will most likely step in and bailout the banks at, you guested it, the tax payer's expense.
The real question is, why did the banks lower their standards in the first place? The fact of the matter is, the real estate market would have frozen years ago if they hadn't. Income has not kept in pace with the cost of living thus gridlock, layoffs and economic woes would have already occurred. The news would have had to blame something else for the poor stock market results and many, many current homeowners would be in apartments now already.
The true blame is twofold: business for not paying a COLA, see COLA Not a Soda, and government for not forcing businesses to do what they should have been doing, paying the COLA. Government's responsibility is to ensure the safety of its citizens. Our government has done so when it comes to external attack, yet it has turned a blind eye and deaf ear to the economic attack from within via businesses, sadly to it's own detriment. If government had kept businesses in line, the average American would be earning more, thus paying more in taxes and spending more on product, which creates more demand and in turn creates more jobs.

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