Subprime mortgages vs. your receivables.(commentary)

We have all read about the fallout in the subprime mortgage area. But it really isn't just "subprime" mortgages that present a problem. We have the ARM loans and interest only loans that are falling into the problem category. The common ingredient for all these loans is that the purchasers didn't qualify for a conventional loan for the home they wanted, but these alternative loans let them in, based upon the hope that their situation would improve.

With the ARM loan, the borrower counts on an increase in earnings to cover the larger monthly payment as the lender raises the interest rate. In the interest only loan situation, the borrower may be doing the same thing, hoping to convert later to conventional loan but is more likely to be hoping inflation will increase the value of the home for a windfall profit at the time of sale. As we all know, that didn't happen.

In the true subprime arena, one of the tricks is to provide the borrower with a loan that puts funds immediately behind the first mortgage to cover the down payment. The first mortgage may also be an ARM or an interest only loan. One of the unfortunate aspects of subprime loans is the borrowers may not have been savvy enough to know they couldn't qualify and would be in trouble down the road. But the loan officer knew he/she would get a commission. Even worse, the ratings companies were complicitous in giving legitimacy to the situation by providing ratings that turned bundles of these types of loans into trading securities. It was all ultimately fueled by greed. Now that the economy has turned down, the poor borrower is at risk of losing his home.

That's when it affects you. Many of ...