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Lending Practices

In the America of our parents, to get a loan to buy a house you had to:

  • Make a significant down payment, usually 20 percent, meaning you had something to lose if you walked away, and had a history of disciplined money management.
  • Be able to make the monthly payment on no more than a third of your monthly income.
  • Limit the loan to twice as much as your annual income.
  • Get an honest appraisal, by an appraiser who worked for the bank.

    All that changed in the frenzied housing boom of the last decade:

  • You could get a loan with bad credit.
  • You could get a loan without a job.
  • You could get a “liar loan,” requiring little or no verification of income.
  • You could get a loan with no money down.
  • You could get an interest-only loan, starting with a low teaser rate, deferring payment on the principle.
  • You could even get a Negative Amortization Loan, in which you didn’t even have to pay the full interest amount each month; instead, the amount of interest you didn’t pay was added to your principle!

    We all know what happened. Sometimes the old wisdom is best.

    Reference: Peter D. Schiff with John Downes, Crash Proof 2.0 - How to Profit from the Economic Collapse (Wiley, 2009), pp. 162-165; richrosa.typepad.com (8/15/2010)