When “The Fed” dropped short-term rates to an unprecedented 1%, it precipitated the cheapest mortgage money of the past 40 years.
That led to creative, new lending practices (interest-only, option ARMs, etc.) which made it easy for borrowers to get into financial trouble.
And that’s precisely what is starting to happen with foreclosures surging across the country.
Now, it’s up to the key players to avoid an avalanche of foreclosures that threatens to bury lenders with lender-owned foreclosed properties.
Who’s to blame?
Eager consumers who bought too much house, lenders who aggressively pushed the money out the door, builders who kept on building despite slowing demand?
Consumers are the ones on the hook and they will pay the highest price, but all of the players share in the blame of consumers becoming over-extended.
Here are some interesting facts:
- 26% of all home loans in 2005 were interest-only.
- In California, 44% of all 2005 loans were interest-only.
- $2.7 TRILLION of adjustable loans will adjust in 2007.
It is somewhat surprising to see the spike in foreclosures without a downturn in the economy.
That seems to signal that we have a housing bubble that was caused by a lending bubble, but we must remember that the borrowers wouldn’t have borrowed if they hadn’t gotten caught up in the speculative real estate fever of the last few years.
Wonder if we could see a repeat of the S & L crisis of the early 80s?