[quote=FormerSanDiegan]I suspect that the underwriting on them is pretty tight (e.g. 75% LTV or better, sufficient assets, and full documentation). These are not bad products for those who have sufficient assets (e.g. could pay off the loan at any time by liquidating accounts).
The real problem with these previously was that they were used with stated income and stated asset loans. These are not good products for those without sufficient assets to pay off a significant chunk of the loan.[/quote]
I agree with you, but only partially. The bank (unless they’re really stupid) cannot honestly believe that the underlying asset is going appreciate at any meaningful rate over the next five years. So are they going to mark their books to the value of the home in five years, or stick to its sale value?
That’s where they all got into trouble. Defaults are one thing. When they are determining their own liquidity (or packaging and reselling the mortgage as part of a group of CDO’s) are they going to tell the truth about the value of the home, or deny reality and just ignore that the house could be worth less than its sale price?
