Jon Carroll

For a long time, I've had a lot of trouble understanding this sub-prime lender thing. It just couldn't be real. I figured it must be some higher economics that I, as a high school graduate, could not hope to understand.

Here's the way it seemed to me: Guy walks into a lending institution and says, "I'd like to buy a house. I have no assets, no job and only one form of identification, a Cody, Wyo., library card."

Lender: "Of course you want to have a house. It's the American dream. Heck, I own a house, and as you can see I'm wearing a suit that cost more than your car. And I know you want security for your family. So how much do you need?"

Borrower: "Did you hear the part about my current financial situation?"

Lender: "This is America! Everyone deserves a break, a second chance, a piece of the pie. I don't even want to know the details. Do you have a dollar in your pocket?"

Borrower: "Sure!"

Lender: "That's your down payment! Simple as that. Now, how big a mortgage do you want?"

Borrower: "Uh, $200,000?"

Lender: "Two hundred K? In this market? Are you kidding? Let's make it 600 K. You can get a nice little starter house in a marginal neighborhood for that. And here's the best part: For the first year, your payments are only $49.95 a month. After that, rates and payment schedules change, but that's a whole 12 months away and in between, you'll be the envy of your friends. Shake, partner."

Now, who on God's earth thought that was a good idea? Couldn't even the dullest adult (like, say, me) see disaster coming a mile away? It did not take a particular kind of genius to forecast despair and heartbreak.

But the lending institution wanted the mortgage because it could sell it to another company that would use the full value of the mortgage as collateral to get a loan to take over U.S. Plumbing and Parrots (USP&P), a publicly held company. And everyone would pretend that of course the loan was going to be repaid, that it was a rock-solid investment, and everyone could trust everyone and all the birdies in the trees sing your favorite melodies.

In fact, not a negative word was heard from the people passing by.

And the borrowers! I can kind of understand the dynamic, using a frat-boy brand of logic. "Hey, we get this great crib right now for peanuts, and the payments will get huge at some point but, dude, by then we'll be in Mazatlan. My brother!" And then there'd be tribal-recognition finger waggling, and they'd own a house.

Or rather, they'd be entitled to live in a house that someone else owned, but they'd still get to be called homeowners and deduct the interest paid from their income taxes, provided they had income.

Come to think of it, maybe that's what the lenders were thinking about too: Mazatlan. As long as the fragile bubble did not burst, they would make a lot of money and purchase, through a dummy corporation, a very large house in Mazatlan. What they were doing was not illegal - indeed, it could even be seen in benign social terms, as lowering the barriers to home owning or some damn thing - but, when everything fell apart, people might get mad and the lenders might want to be in Mazatlan, where they could surf the same beaches as the people who borrowed money from them.

Not surfing the beaches would be anybody who took this subprime lending stuff seriously. That would include young families who somehow thought their house came with magic beans, and the holders of stock in subprime lending companies, who also believed in magic beans, plus an unknown number of citizens who invested in some fund somewhere that was trying to show a high rate of return by purchasing subprime mortgages.

"What's safer than real estate?" they would say. "They're not making any more land." It's a seductive line, but it's just another line, much like "I'll call you in the morning." And then everybody runs around for a while singing Bruce Springsteen songs, and stocks go tumbling and people sell at a loss because people mutter "dot-com, dot-com" to themselves with great regularity while waiting for their broker's Web page to reload, and finally the business page has something to write about.

I know I must be missing something, because it can't be this simple. The fundamentals are sound, we are told, and the Fed is sanguine, and Fannie Mae and Freddie Mac are doing just fine, so settle down, little children, as you sleep on your aunt's sister's couch. It's all a big adventure.