A Bank Is Survived by Its Loans

In a mortgage market gone crazy with generous loans, no one was more generous than World Savings.

Lots of banks offered mortgages that allowed borrowers to pay less than the amount of interest being charged, but World was virtually alone in making loans that let the borrower continue to make small payments for a decade, rather than two or three years.

Most banks forced the borrower to start making much larger monthly payments if the amount owed — an amount that could rise each month if the borrower made the minimum payment — rose to 110 percent of the appraised value of the home when the loan was made. World saw that as stingy. It did not force the payments up until the amount owed was 25 percent greater than the original value.

You can’t get loans like that any more, of course. But World’s old mortgage loans live on. Other banks, where escalating monthly payments are either here or on the immediate horizon, are facing the need to foreclose or renegotiate many loans. Within a year or so, most of those loans will have vanished, for better or worse for the homeowners and for the neighborhoods those homes are in. Read more…