“Stated income” is the mortgage-industry terminology. Many lenders accept stated income (without verification) for anyone claiming to earn less than $100K/year. Which is pretty much everybody. So, you tell them how much you make, and fudge it a little bit, because, you really want that house in the nicer neighborhood with better schools and you’re sure if you budget responsibly you can swing a slightly higher payment. And then you get your loan with an ARM that’s complex enough that very few people have any understanding of how they work.

But the skinny is: You might start with an interest-only payment. The principal which you are not paying, or the interest which you are not paying, is rolled onto the back-end of the loan, and when your ARM expires you’ve got a higher-than-initial balance, amortized over 27 or 25 years, instead of 30. And rates are rising. WaPo reports that they’re coming under more federal scrutiny now, but I think the damage has already been done.

“It seems to me there’s been a race to the bottom” in lending standards, said Sen. Jim Bunning (R-Ky.). He said that consumers don’t seem to understand the new products, and that if real estate values continue to fall, the market “pullback” could become “a prelude to a crash.”

Until recently, the lending industry had said the loans were being marketed to people with only the strongest financial records. But a report released yesterday by the Government Accountability Office found that about three-quarters of people whose option-ARM loans were packaged into securities in the first half of 2005 were not required to fully document their income.

These are bad loans, being lent to sub-prime borrowers. It all adds up to substantially higher payments than most borrowers anticipated, and consequently, much higher than most borrowers can afford.