Just another primer on subprime lending

For the last couple of years there have been lots and lots of articles on the (alleged) subprime mortgage crisis. I disagree with about 98% of these articles which can only mean 1 thing. 98% of the articles have it wrong. So I have decided to put my thoughts on this crisis into the blogosphere to try and lower the error rate on this subject.

The first issue I have with subprime lending is the misconception that it is the major cause of rising foreclosure rate. These mortgages are 3-5 year adjustable rate mortgages (arms) with a lower "teaser " rate designed for people who otherwise could not get a mortgage. When the 3-5 year period for this teaser rate expired, the arm would be readjusted to reflect prevailing interest rates. If % rates are lower, the borrowers get the same payments or even a lower one. If interest rates are higher, the new payments are higher. This oversimplified explanation is partially due to journalism's need for a brief attention getting headline to grab people's attention. The real cause of the increase in foreclosures is a confluence of several changes in the american economy. No editor would ever allow a headline which read "Foreclosures on the rise due to subprime mortgage's expiration of "teaser" starter rates when interest rates are increasing along with overall increase in the inflation rate, especially food and energy." Do you think all of these mortgages would be at risk of foreclosure if gasoline costs were lower when these mortgages had to be renewed? What if interest rates had stayed the same or food costs had lowered? Do you see my point here? Good, I'll expand on this as well as other misconceptions about this crisis in future posts.