There are all sorts of tricks that involve having the ultimate lender take most of the market losses when times are bad, without equal participation in market gains when times are good. Some of these tricks are legal, and some are not. I’ve seen both. From what I’ve heard, too few of these abuses are prosecuted (if illegal) to effectively prevent it from happening on a broad scale.
Will such abuses become normal social behavior? Calculated Risk posed that question the other day. If everyone were to pursue their personal interests to the limit of the law, society in general would fall apart. If every borrower starts to take maximum personal advantage of the extremely favorable options built into most mortgages, then I’ll guess that mortgages as we know them will not be here in 5 years time.
Apparently investors have been writing these one-sided contracts for years, and are about to take lots more punishment because of that. Why they keep handing money over for this kind of arrangement is beyond me, but every time I see HLS and other mortgage brokers post here, they say they can still get people loans with less than 20% of their own money down, so the game is continuing, for a while.
