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by Mark Walters
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djustable-rate and interest-only mortgages accounted for nearly two-thirds of mortgage originations in the second half of last year.
Loans of that type help push up housing prices, because they carry lower initial monthly payments, enabling borrowers to purchase more expensive homes. Basic economics... if more people can buy homes there is more demand... More demand means higher prices.
The rise of interest-only loans, coupled with acceptable higher debt levels for borrowers and tightened bankruptcy laws will probably soon lead to an increase in foreclosures.
If you are buying a home with an interest only loan and the value of that home drops... it is very easy for the borrower to just walk away from the payments. After all, they've built no equity in the property.
Both the Clinton and Bush administrations have pushed a policy of low interest rates and easy mortgage loan qualifying. If every voter has a home they are happy and will vote for the party in power seems to be the limit of political thought.
The truth may be that the government is setting people up for failure and financial pain. Far to many people are buying homes they really can't afford. When interest rates rise... as they surely will... all those adjustable rate loans will act like debt-traps. Interest rates will go up while wages remain stagnate. The result? More foreclosures and financial ruin for many.
There are international forces at work that will not continue to support our government's wild spending habits by buying its low interest bonds. Interest rates must rise. sooner or later?
Bubble or normal cycle... it makes little diff |
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