How the Housing Bubble Worked

If you want to cut to the chase on the “sub-prime mortgage meltdown,” or whatever we’re calling it these days, tune into this post by Berkeley economist Brad DeLong:

Let’s look at the loan history on this property…. The property was purchased in January 2005 for $1,157,000. The combined first and second mortgages totalled $1,156,730 leaving a downpayment of $270. Let’s just call it 100% financing. By April, they owners were able to find refinancing through Countrywide with a $999,999 first mortgage… Option ARM with a 1% teaser rate… a simultaneous second mortgage for $215,000 pulling out their first $58,000. So look at their situation: They are living in a million dollar plus home in Turtle Ridge making payments less than those renting, and they “made” $58,000 in their first 4 months of ownership.

If you’re playing by the so-called rules, it’s revolting.