About seven hundred thousand houses in US had to undergo foreclosure in 2005 and this year the figure is likely to double. Even more the size of the ARM which is expected to get reset in next eight months is about 600 billion and includes some 2 million houseowners.
The foreclosures and home-mortgage defaults are likely to cause more pain in US because a lot of mortgages will be having the expiry of the freedom period (interest only), and teaser rates (initial low rates). The payment on these mortagages may rise considerably and lead to higher defaults. According to Bank of America $362 billion ARM is up for reset its interest rates. But this is not the only reason. According to a report by Wall Street Journal many subprime loans went bad during their initial periods.
{Teaser rate is a reasonably low interest rate in the starting, which is increased after a set period, generally 2 years. An example of a teaser rate is a rate of 6.5% which rises to 9.5% after two years.}
Adding to the pain is the crash of housing market due to which the value of property has reduced drastically leaving many borrowers and house owners with a loan amount more than the value of their property.
How can the situation be controlled?
The situation is getting out-of-control by the time. Though Fed has reduced the interest rates, its effect is not significant. The country’s money supply is squeezing and dollar is degrading. Injecting more money supply into the system, lowering interest rates further may help solve the situation, but in the long run better regulatory measures are required to prevent or identify any kind of uncontrolled activities in the economy early to limit the damage. Big banks can recover from billions of write-offs in their balance sheet but what about a normal person who has lost all his/her life’s earnings including his house. It’s a very urgent matter and needs to be dealt with immediately to control the extent of damage.
The foreclosures and home-mortgage defaults are likely to cause more pain in US because a lot of mortgages will be having the expiry of the freedom period (interest only), and teaser rates (initial low rates). The payment on these mortagages may rise considerably and lead to higher defaults. According to Bank of America $362 billion ARM is up for reset its interest rates. But this is not the only reason. According to a report by Wall Street Journal many subprime loans went bad during their initial periods.
“…While many accounts portray resetting rates as the big factor behind the surge in home-loan defaults and foreclosures this year, that isn't quite the case. Many of the subprime mortgages that have driven up the default rate went bad in their first year or so, well before their interest rate had a chance to go higher...”
{Teaser rate is a reasonably low interest rate in the starting, which is increased after a set period, generally 2 years. An example of a teaser rate is a rate of 6.5% which rises to 9.5% after two years.}
Adding to the pain is the crash of housing market due to which the value of property has reduced drastically leaving many borrowers and house owners with a loan amount more than the value of their property.
How can the situation be controlled?
The situation is getting out-of-control by the time. Though Fed has reduced the interest rates, its effect is not significant. The country’s money supply is squeezing and dollar is degrading. Injecting more money supply into the system, lowering interest rates further may help solve the situation, but in the long run better regulatory measures are required to prevent or identify any kind of uncontrolled activities in the economy early to limit the damage. Big banks can recover from billions of write-offs in their balance sheet but what about a normal person who has lost all his/her life’s earnings including his house. It’s a very urgent matter and needs to be dealt with immediately to control the extent of damage.
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