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Sunday, May 09, 2004

Is The Economy Crumbling?

I found this piece from Washington Monthly sobering. A long look at the economics of refinancing and the anticipated, yet dreaded crash resulting in a raise of interest rates. Interest rates are at the lowest they have ever been. And through the 1980s and 1990s, changes in the Fanny May and Freddie Mac federal home loan programs have spurned the growth of the mortgage broker industry - an industry that didn't even exist 20 years ago. More homeowners exist now than ever before, owed in part to a home building boom and in part to a readily available chunk of "guaranteed" cash. Home buyers can shop around until a home loan is secured and home buyers are buying into larger and larger homes. They are also refiniancing at unprecedented levels and unfortunately, many have taken some form of an Adjustable Rate Mortgage (ARM). When those interest rates begin to rise, and they will rise, the system will be hard pressed to make those balooning payments. There will be no incentive to refinance at higher rates and many, many, many formerly happy homeowners will go into default. The article suggests that it isn't a matter of if, it is a matter of when. And the Federal Reserve and its most prominent face, Allen Greenspan, have been giving Congress and Wall Street small, tell tell signs that the rates will be going up soon. As sellers begin to struggle to sell home, the home prices will tumble and a market spiral crash, along with the "jobless" recovery is anticipated. I have seen this argument before and many economic experts have compared the impending crash to the S & L bailout crisis of the 1980s.