The "ARM" and leg that’s not being talked about

Over the past couple of weeks there have been a few headlines about housing prices and home sales increasing along with an overall economic recovery.   The so-called economic recovery is fragile and bifurcated in the sense that Wall Street is having a party while the regular folks worry about having jobs and covering the mortgage.   The headlines are deceptive and as bad as things are, they’re set to become much worst.  Few are talking about it because they don’t want people to panic but make no mistake, another wave of financial crisis is coming to a neighborhood near you.

An article from CNN Money describes the problem arising from resetting payment option adjustable rate mortgages.  These mortgages allowed you to pick your payment and were the way that folks were able to shoehorn themselves into a house they otherwise couldn’t  afford.

As I mentioned in a previous post and as mentioned in the article below, many of these are resetting to a fully amortizing mortgage payment which will have the effect of doubling or tripling monthly payments.  There are about $ 500 billion of these types of mortgages outstanding with resets slated to begin in earnest during the next year or so.  This will trigger another wave of foreclosures.

In addition to the problems on the residential front, it’s been projected that about $ 750 billion of commercial real estate mortgages will default over the next few years.  This is mainly due to tenant vacancies due to loss of business and etc.   Many believe the commercial mortgage defaults will have a bigger impact on banks than the residential mortgage problems.

The FDIC, which insures bank deposits,  is nearly broke from the covering existing bank failures that are occurring very quietly.  The problems with the option ARMS and the commercial mortgages will mean more bank failures and the FDIC kicking in to insure deposits.   That means basically means you and I will be paying for this while dealing with whatever is already on our plates.

Something has got to be done, before we sink into the abyss.

Recently,  I heard guy on a radio talk show with an interesting proposal revolving around a mortgage holiday.  His proposals are summarized here: .  Basically, he proposes a stimulus plan where everyone’s mortgage payment would be suspended for one year and during that time, you’d be able to direct what you’d be otherwise paying on your mortgage elsewhere.  So if you wanted to direct your money towards cleaning up something like credit card debt, you’d be free to do so,  or if you’re unemployed and simply need a breather, you’d be free to do so and so on.

To be honest, this would be far more helpful to most people then anything else I’ve heard about.

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