Sky Mortgage

Now, with interest rates going up, and difficulties hitting the housing market, what will happen? Will there be a slow and slight decline in home prices, that is, just an adjustment, or something more jolting? No one can tell for sure, but with the large amount of exotic mortgages on the market, chances are a lot of individual families will not be able to pay their mortgage. That means that there will be a lot of foreclosures and potential havoc on the market.

According to the consumer advocate group ACORN, a number of cities are undergoing a wave of mortgage shock, especially in the Midwest and in the South. Cities cited include Flint and Detroit, Michigan, and Jackson, Mississippi. The dangers of Adjustable Rate Mortgages (ARM) have long been noted by economists. As interest rates go up, the mortgage payments go up in ARMs, and many are also combined with Interest Only (IO) Mortgages. That is, that in the first three to five years of the mortgage, the homebuyer only has to pay the interest payments on the loan, but this means that extra payments are deferred on the principle. So when the initial period is finished, payments balloon, and the homebuyer has to pay the interest, principle, and unpaid additional money from the initial period.

These mortgages have been used in about 30% of all mortgages last year, but are especially targeted to the people with the lowest credit who get sub-prime mortgages. The result is already, from mortgages several years ago, a higher rate of default. These houses will then be sold on the foreclosure market, and tend to bring down the general prices for houses in the affected markets.

There will be local effects of more opportunities for real estate agents who buy homes at the last minute from homeowners about to default on their homes. There will also be more opportunities at foreclosure auctions to buy cheap homes. But what other macroeconomic effects will there be?

One interesting effect is one the huge debt market, the $6.1 billion Mortgage Backed Security (MBS) market. According to a Goldman Sachs spokesman, ARMs totaling about $1 trillion will reset in 2007. An undetermined number of these will also hit the balloon payment phase, when the Interest Only period ends and full payment of the mortgage begins. Undoubtedly, there will be a fall in the pools of mortgages value, and the value of MBSs. More homeowners will get a refinance of loans, but like before the 1930s, never have any prospect of paying their home mortgage.