Originally Posted by x5GuyInLA

Most of your ARMs follow the fed rate. Back a few years ago when the fed rate was at 1%, you could get a loan in the mid to high 3% and low 4%, with some options just slightly above the fed rate. It made more sense to get an ARM if you weren't planning on living in a home that long and wanted to keep your payments low. When the feds started raising their rate to control inflation, I think that's when your I/O and negative amoritization loans started becoming popular with the masses because it still kept payments low and your equity was building through appreciation as opposed to traditionally building equity through paying off your loan. That kept demand for homes high...any joe shmoe could get a loan...495 fico? no problem! Re-financing and HELOCs didn't help either. Well now that joe shmoe's rate is adjusting and appreciation hasn't gone up as much as they hoped, they can't afford the payments, they've maxed out their equity and they might have been laid off because their company had cut backs. You're right, buyers were short sighted, but it didn't help that lender guidelines were so lax and that many mortgage brokers doctored documents to get their loan through.