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Mobs, Messiahs, and Markets by Lila Rajiva, Will Bonner

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Flimflam Spam

By 2002, homeowners were ripe for even bigger absurdities.

Traditionally, mortgage lenders needed to first make sure that both the borrower and the market were solid, or they weren't prepared to lend money. They figured that if the borrower failed, the market would have to be strong enough for them to recover their loan. But the new mortgage lenders rarely met the borrower. And they had already judged the market foolproof.

Determined to prove it, they lent to the fools, and in so doing, turned into knaves.

There was no end to the number and variety of nontraditional mortgages flourishing—adjustable‐rate mortgages (ARMs), of course (accounting for 40 to 50 percent of all mortgages between 2004 and 2006), but also zero‐down payments, teaser rates, interest‐only mortgages, flexible payments, and “stated income” applications—so‐called liars’ loans—which the borrowers used their imaginations to fill out. There was even a negative amortization (neg am) mortgage—a diabolical innovation wherein the principal actually grows, even while payments are being made on time. Many mortgages, thus, were not really purchases at all, but options that gave the borrower the right to buy the house sometime in the future—if things went well.

In 1999, only 5 percent of loans were subprime—that is, mortgages made to marginal borrowers. Five years later, 20 percent were.5

It is estimated that there are now $1.5 trillion in subprime loans in the market, a huge number of them with no money down ...

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