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Quick Take: Subprime Scariness

The news about the recent subprime disaster scares me.

I'm not alarmed by the notion that New Century Financial (Nasdaq: NEWC.PK  ) , Accredited Home Lenders (Nasdaq: LEND  ) , Novistar (NYSE: NFI  ) , or any other subprime mortgage lender might go out of business. Nor that companies like Countrywide Financial (NYSE: CFC  ) might get hurt in the fallout. Heck, future regulatory changes to the mortgage lending business don't worry me.

No, what frightens me to the core is the lack of critical thinking that seems to pop up over and over during this drama.

Act one of 2.2 million?
I just read about the latest character in the subprime multi-act tragedy, and the 2.2 million others facing the real possibility of losing their homes. The linked story highlights a middle-aged woman's overwhelming struggle to deal with the surging payments on her creatively financed mortgages.

The woman's situation stinks, and I feel for her, as I do for all those who see mortgage-induced foreclosures on the horizon. I really do. As a homeowner, I would hate to lose my piece of the American dream.

But unless she was truly duped, should I feel sorry for her? Bear in mind, I'm not saying that lightly.

Here are some things, in hindsight, that I don't understand. First, why was she putting herself in a situation where her payments could be radically higher than her take-home salary? At record low interest rates, she had to know a soaring mortgage payment was a possibility. Also, why did she keep using loans to pay off loans? That's the death spiral!

Who's to blame here? The mortgage lender? The family member selling her the house? The buyer herself? (Whatever happened to "caveat emptor"?)

Clearly, all three played a role. But the apparent greed of everyone involved seems to have turned this woman's American dream into a nightmare.

It didn't have to be that way.

Retail editor David Meier does not own shares in any of the companies mentioned. He is currently ranked 478 out of 24,310 investors in The Motley Fool's CAPS rating service. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.


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