He did not say anything to them without using a parable.... Mark 4:34
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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)