During the past few years we have been talking about toxic mortgages -- and the need to avoid them. Without fail, each time the subject has arisen lenders would write to say we were wrong, that option ARMs and interest-only loans were simply "affordability products" with no financial sting. As to prepayment penalties and stated-income loan applications, they were -- we were repeatedly told -- minor concerns and not much of an issue.

We were needlessly worried, said lenders, because strong credit scores assured that borrowers could easily handle financing costs "if" monthly payments rose. But toxic loans were engineered to guarantee higher costs once start periods ended. There was no "if."

The credit score argument never made sense because good credit was being required before borrowers faced higher monthly costs. It's easy for some households to be well-qualified with a $1,200 monthly payment -- but underwater when that same bill rises to $1,800.

The other argument made by lenders has been that they were social do-gooders, moral folks offering cheap loans so more families could own housing.

Now we know that the do-gooder argument doesn't hold water. Figures from the latest Census Bureau survey show that homeownership in the last quarter of 2007 was down to the lowest level seen since 2002. You remember 2002 -- that was before toxic loans were widely marketed.

The reason millions of people are facing foreclosure today is very simple: A lot of money was made originating, selling and packaging loans with terms that were unfair and unconscionable from day one. Like tainted food, defective cars or toys covered with lead, such flawed financial products should be recalled at no cost to the consumer. After all, isn't that the moral thing to do?

Published: March 19, 2008

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