reckless-endangerment-by-gretchen-morgenson

The voraciousness of these firm s would also push the

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The voraciousness of these firm s would also push the nation’s economy into its most serious recession in more than seventy-five years. Their avarice would finally, and forcefully, demonstrate how a noble idea like homeownership could be corrupted into something that so poisoned the global economy it was left in a semi-vegetative state. Morgenson, Gretchen (2011). Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (pp. 272-274). Times Books. Kindle Edition. Interest rates were on the upswing in 2004 and adjustable-rate mortgages no longer held the cachet for borrowers that they did when rates were in decline. If they wanted to keep their profits coming, lenders would have to come up with some new and compelling products that would allow borrowers to grab the biggest and best house for the buck. Interest-only mortgages were just the ticket. These loans were not exactly new they had been around for decades as a wealth management tool for well-heeled borrowers. Taking the money they would otherwise use to pay down principal on a mortgage, sophisticated borrowers would invest it in higher-yielding instruments. The borrowers would use the money earned on these investments to pay down loan principal later. But as often happens in the financial markets, Wall Street took a product that had worked well for a small group of sophisticates and began hustling it to the unsuspecting masses. Never mind that the complexity of these loans almost guaranteed that they would be misunderstood by first-time homebuyers eager to grab hold of the American dream. To lenders concerned about a decline in their business, and to the equally worried Wall Street firms who financed them, the disasters lurking in these loans were somebody else’s problem. Besides, home affordability was becoming a huge obstacle for first-time borrowers, the very participants who were necessary if homeownership was to keep climbing. After almost a decade of exploding demand for real estate, driven by a combination of demographics, industry
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RECKLESS ENDANGERMENT by Gretchen Morgenson Page 56 of 66 av arice, and Washington’s lusty support for homeownership, real estate prices were in the stratosphere. New borrowers were once again being shut out of the game. To their “rescue” came lenders peddling the interest -only mortgage. While a borrower of $100,000 might have had to pay $600 a month on a fixed-rate mortgage, his payments on an interest-only loan, during the early years anyway, would be $500 in interest and $100 in principal. By choosing to pay only the interest, the borrower had an extra $100 to play with. What many borrowers did not want to understand was that by avoiding paying down any principal on their loans, they were not building up any equity in their homes. By not paying down principal, the size of the mortgage remained the same.
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