Richard Bitner appeared on The Daily Show tonight promoting his new book, Confessions of a Subprime Lender. Jon Stewart wondered why the people who have the toughest time paying a mortgage are charged the highest rates. Bitner's reply--that they are riskier--is correct but unsatisfying.
We want it to be higher for them. High payments discourage those who have little chance of paying them back. It not only reduces default risk, it generates the incentive for banks to offer these loans in the first place.
America's financial system is not perfect, but it makes a lot more sense than it appears when you take a moment to think about it.