The lowest number I have seen is 30%, which I get from the results of various agencies that are out there trying to deal with these loans. That is certainly an undershoot because of the declining home values.

But let’s use the 30% number. How did these people get there? Well, the most common varieties of these loans were 2/28s, with an initial low payment but high underlying margins, and the commission paid to brokers for writing these was substantially above the commissions on near-prime or prime loans. The brokers maximized their profit, and the borrowers didn’t realize what they were doing because the initial low payments made the loans look “prime”.

Scott, that’s true when the purchaser has not suffered a (non-predictable) loss of income, but simply bought a house on an ARM where they could pay the teaser rate, but not enough to ever pay back the loan. However, I suspect that most of the bad mortgages were minimally credit-worthy, in that the buyer had barely the income to pay it back; they’ve now gone bad because the market value of the house has plummeted to far below the remaining amount owed, and either the buyers have lost their jobs and cannot keep making payments, or they have merely discovered that it makes financial sense to default on a non-recourse mortgage that’s deeply underwater. McCain’s proposal doesn’t shut these ones out of the bailout.

The mortgage crisis was essentially caused by structural economic problems, resulting in incentives and ownership of capital being in conflict. As was pointed out, the people selling the mortgages did not themselves hold the debt, and hence had a perverse incentive to sell bad debt.

Solution to prevent this in the future? Beats me.

Solution for now… if necessary, have the central banks inject *temporary* liquidity so that the derivative ownership/value confusion can be unwound without an economic collapse.

1) On the principal of lesser evils, McCain gets my vote. We can talk about economics all we want, but wait until the first smuggled nuke blows up in a US city or two. Then all the rest of this will be trivial (especially considering the economic effect of that nuke).

National security is by far the most critical issue that people should be concerned about. There are hostile nuclear powers (China, Russia) that are against us for geopolitical and economic reasons. There is a world-wide Mahdiist Jihad that threatens our existence due to the unprecedented coexistence of suicidal terrorists, modern travel, modern mass media, and unimaginable destructive technology.

McCain at least understands thatt issue. I don’t know if he understands much else (other than honor – he is an honorable guy), but he understands the one that counts. Obama and Hillary manifestly do not, and even if they didn’t have exactly the wrong instincts, the people they would appoint from the Democrat stable would be unable to handle these threats.