Professor Elam

First you have to remember that our buyer is an unsophisticated person with no understanding of the I = P x R x T thing. They never calculated what this was going to cost or the probability they could pay for it anyway. And they are assured this is better than renting, after all they are told it will build equity, why throw away money on rent goes the pitch.
In fact a thity year note will not grow equity for years even if prices remain stable, which of course they did not.
Next people are prisoners of what is happening now and what has just happened, not what happened in 1981 or 1931. So they make long term decisions on short term information, gee rates are going down of COURSE I want an adjustable rate loan, hey it will get easier not harder to make the payments.
Realize that most car ads are quoted in monthly payments with no reference to the total number of months.

And remember this is a person that probably never expected to OWN a home anyway, he or she expected to rent for their entire life. They have to be talked into this deal and that is part of the pitch.

Now as for Snerdly the Shark, why would the lender loand to people that he knows may not be able to pay.

Actually the lender does not intend to hold the loan anyway, it’s not HIS problem long term. Think thru this.

The bulder builds the home.
A captive realtor employed by the lender sells the home out of the model home in the new subdivision. The realtor ‘qualifies’ the buyer.
The loan is submitted to a national finance company. It is approved.
The loan is then re packaged, and re sold. Actually the only thing that concerns the realtor is whether the buyer has to pay points, a percentage of the required to qualify for a lower payment. The fewer the points the easier the sale as the buyer does not have to come up with more cash.
But I digress, now the original lender has made a percentage for originating the loan and certainly has charged whatever fees he can get away with. He then re sells the loan into a govt guaranteed package to GNMA or MER or Bear Stearns. MER or
Bear then re package the loans for different reasons as explained above. They pay themselves handsomely for doing this in the form of underwriting fees as they securitize the loans to their clients, otherwise known in the trade as sheep or pigeons depending on your part of the country.
Mr. Pigeon buys the loans cleverly re packaged as something like
Securitized Equity Fund III for Income Investors

sounds safe enough for little old ladies, right!

Now of course notice that

The builder got paid
The realtor got paid
The appraiser who bids the values ever higher got paid and notice this, hired again, why, because the higer the home value the greater the mortgage and the more our mortgage loan officer makes for his/her one quarter percent for originating the loan, ain’t we The Donald now!
The underwriters who repackaged the loans made underwriting and origination fees, and oh, commissions for selling them to their sheep, er, clients, sorry….

So everyone is making money, darn this real estate thing is great! And so the builders keep it up until only the very very worst credit risks have been reigned in, then when rates are as low as they can go and investors, the smart ones, start smelling risk, the rates start up.

Then the game of Wall St Muscial Chairs begins, last one standing has to collect on those bad loans she is holding.
Poor credit risks cannot pay, the mortgages cannot re pay the money due the buyers of the short term commercial paper that financed te mortgage pools, and gee we have an impairment problem.

Of course if you saw this coming and sold all your houses or mortgages to that greater fool who is always out there, well, we can party in Cancun or Cabo can’t we?