by
Carl Hampton
09/28/2007
Approximately 2 million homeowners, a
majority being in minority neighborhoods,
are at risk of losing their homes, either
through default or by foreclosure.
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.”
