Listening to the news or reading the newspaper might convince you that there will be millions of home foreclosures because interest rates will change on loans that had below market “teaser rates”. Interest rate changes do not cause foreclosures! Foreclosure starts when the borrower stops making payments. Historically this happens when a borrower has financial problems arising from loss of job, divorce, or medical problems.
Today we have an additional issue of speculators obtaining loans expecting to make a profit by “flipping” a home, meaning: buy, with someone else’s money (the lender), sell before there are very many payments, at a big profit, because “real estate always soars in value and there is always a buyer for an inflated value”. Of course this is misconceived with no idea of history. And the only exit plan is to let the lender have the property back. It is a real estate pyramid game…even though pyramid games are illegal in most, if not all, states.
Teaser rate loans are good for certain situations. I like them for qualified buyers. If they can obtain a loan with lower interest for a year, I suggest that they make payments at the same amount they would make for a 30 year fixed market rate loan. Their payments would go mostly to principal, thereby reducing the loan balance. If and when their loan interest rate changes, they will be paying on a lower balance.
If the loans were obtained under fraudulent conditions, either on the borrower or the lender side, there should be additional punishment besides foreclosure. Better safeguards need to be in place that will protect the consumer, and those that invest in mortgage backed securities.
As we can see in today’s situation, the consumer, the neighbors, the stock market, the economy, the country, and even the world are hurt by housing foreclosures. Let’s not fool ourselves into believing there is only one cause (interest rate changes) and only think of one solution. We need to address a menu of solutions from a variety of sources, from the individual learning to make good decisions, to the lenders, institutional investors, and also to government decision makers on monetary and lending policies.
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