What’s really the root cause of the US mortgage crisis?

This story is too good not to share with all of you. I just got this in my email from my good friend Doug in California, and he agreed to let me post it.

Lee,

I don't remember if I told you this story or not; it's been a year or two since this happened.

I was at a gathering and talking to a couple that had bought a place with a 80\10\10 with all of the bells and whistles (interest only, introductory rates...). They were explaining to me how a) they could afford the house and b) it all worked, after I commented that I couldn't afford the house they bought.

Them: We paid $600,000, but we only have to make interest payments for the next three years, so we're only paying around $2,500 (that month, until their lines rates started moving up). Then in three years, when interest rates are lower than they are now (ha, ain't happening), we'll refinance into a 30 year fixed.

Me: What would the payment be on $600,000 for 30? Say at around 8%? Wouldn't that be close to $4,500 a month?

Them: First off, in three years, rates won't be 8%, they're going to be 3-4% (okay, whose ass was that pulled out of?). And we won't have a $600,000 loan due to the equity.

Me: Due to the equity? How does that work?

Them: It's from the appreciation. Our house will go up a minimum of 10% a year, so in three years it'll easily be worth $900,000 (okay, that's more than 10% a year). So we'll have $300,000 of equity. That means when we refinance, we just have to get a loan for $300,000; the difference between the $600,000 and the $300,000 equity.

Me: How do you get the $300,000 equity out in order to reduce the $600,000 down?

Them: You don't need to, it's already there.

Me: Ah! Wow, you guys are really on top of this, that's pretty slick.

Them: Yeah, it's hard to believe that people are so stupid as not to take advantage of free money.

So what is the root cause of the US mortgage crisis?

It's because of people like them!

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