Quote:
Originally Posted by akv
If someone makes $50k a year, they know they can't afford a $600k house
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Do they? Seriously, do they?
Let's suppose...just for discussion...that we believe that houses will appreciate at around 8% per year. We see that it has happened for years, and the real estate agent tells us it will continue. The loan officer nods and agrees. Our neighbors do, too.
The loan? We get a NINJA loan (No Income, No Job, No Assets) - they don't even ask for such things. We get a negative amortization loan - so we pay a mere 1% interest, and add the difference (4% or so) to the mortgage balance. Of course we put nothing down!
The payments? At 1%, it's only about $500 per month. Our $50K buyer can make those payments easily enough. Better still, we're assured by the real estate agent and the loan broker (who got paid nice commissions on the transaction) that we can always refinance later.
Now if - a very big if - our underlying assumption is valid, then the house will increase by 8% per year, but our mortgage balance will increase by 4%. We have a net gain of 4% per year - we make $24,000 per year, all on borrowed money. What could possibly go wrong?
Now we're smart. We understand that exponential growth is inherently unsustainable, and that distortions of prices - even in housing - must revert to the mean. But - half the population is, by definition, below average intelligence. Will they understand? I doubt it.
So long as we're speaking of responsibility, what of the various professionals - often very well paid - who facilitated all this? Who profited from it?