I agree with Poway. I/O and other non-conventional (although now they may be called conventional!) loans were created with a specific purpose. Take, for example, a medical student that knows he will have a significant increase in income in two years, once he is done with residency. However, he has kids and wants to purchase a house in a good school area now. This is a perfect case for an I/O loan…it allows them to get into the house and it is relatively assured they can pay the increases when the time comes.
It should be clear from the above example that these are very rare cases; the loans are being used for other than their intended purpose. What happens when a tool is misused? It breaks!
I will have to say though that this will be a real test of resiliency for many Californians. While the extravagance really came out with radically increasing home values, will we see extreme thrift as they decrease? Rented out rooms, working longer hours, eating in, less travel, using coupons? I think we will see people really stretch to make it. I, and many of the people I know have made it through tough times using these tactics.
