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June 16, 2005

Like Watching a Car Crash

Occasionally, economic disaster hits without warning.

Other times it's like watching a car crash in slow motion, with plenty of time to warn everyone, but no one seems to do a damn thing. Take the looming housing meltdown:

The problem is that new types of mortgages that hold down monthly payments for families - helping many buy homes that they would not otherwise be able to afford - also require potentially far higher payments in future years. The bill will soon start to come due in a serious way, as the initial period of fixed payments, typically set at artificially low rates, expires for millions of homeowners with adjustable-rate mortgages.
By 2007, over $1 trillion of mortgage debt will switch over to exploding adjustable payments, threatening to sick family finances across the economy. Some of these new loans look designed to trap homeowners in debt:
This year's fashionable model, known as an "option ARM," allows borrowers to make payments with monthly rates starting as low as 1.25 percent for the first five years of the loan; the average rate on a 30-year, fixed-rate loan is about 5.6 percent.

Everyone is counting on rising house prices to let them buy them out of debt in a couple of years. But if housing prices just stabilize for a couple of years, all these families are completely screwed, since these deals mean their debt will actually be increasing during these initial years.

And the irony is that these kinds of fake cheap mortgages allow people to bid on houses they can't afford, drive up prices to make them even more unaffordable, feeding the cycle of housing speculation and household debt.

Regulations to ban such loans would not make homes less affordable-- they would actually cool the housing speculation and inflation that's driving people into this speculative debt nightmare.

Posted by Nathan at June 16, 2005 07:33 AM