The housing bubble encouraged homeowners to apply for Adjustable Rate Mortgages (ARM?s). New homeowners were able to purchase ?zero dollar down? properties, whilst existing homeowners re-financed, either to upgrade their homes, or spend the cash on luxury items.
However, a majority of those homeowners with poor credit signed up for adjustable rate sub-prime loans (a higher cost loan), now those loans have been reset to higher rates of interest, and it is proving incredibly difficult, if not impossible, for those homeowners to meet their payment schedules.
The housing market turmoil is affecting the financial markets, and the broader economy. Former Federal Reserve Chairman, Alan Greenspan, has stated that he did not realize the potential damage sub-prime mortgage lending to borrowers with poor credit could do to harm the U.S. economy.
How could the head of America?s central bank (the Federal Reserve), the most powerful economic planner in the world for almost 20 years, not have realized that cold, hard fact? Why the Chairman would have had the responsibility (twice a year) to raise, lower, or keep the level of U.S. interest rates the same is an interesting question, considering that we have a market economy that is supposed to do that!
Lowering interest rates makes the future more valuable relative to the present; raising interest rates makes the future less valuable. More people in the economy focus on the future when it is seen as being more valuable, thus more action is taken that affects the future: construction, research funding, and the building of factories to produce more goods. When the interest rate is lowered it shifts the economic attention and focus from the present to the future.
Low interest rates encouraged the housing boom; helped the faltering U.S. economy function. Unfortunately, those low interest rates fostered hope in borrowers with poor credit, spurning a high driven sub-prime market.
Could the Federal Reserve?s (mis)management of the housing boom been handled any differently? Perhaps interest rates were left too low for too long, and lending practices were not regulated efficiently?
Now it?s time for lenders to help borrowers restructure their mortgages, not an easy fix, but necessary in order to prevent a downward spiral.
?Your? Money Matters by Carl Hampton
From the Author of ?From Credit Despair To Credit Millionaire.?
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