Seasoned Banker Throws Up Hands

[Credit practices, which would have astonished prudent lenders fifteen years ago, have become commonplace in small town America. Homes which are for sale advertise “no money down” on the front yard for sale sign. Why do borrowers and lenders believe 100% financing is reasonable? They are assuming property prices will continue to rise because most everyone they know is assuming the same thing. The herding impulse exerts a strong pull.

We are currently basking in this Nirvana of rising property prices, which facilitates the extraction of equity for consumer expenditures. There’s nothing quite like repaying debt for cars, vacations and other consumer items over fifteen to thirty years. Critically, however, every dollar of debt and the interest thereon are claims on the consumer’s future income. The consumer and all of us had better hope the income does not become impaired through economic recession as many years will be required to reduce the debt.]