The bear trap has sprung.
John Q. Homeowner seemed unaware that his foot was in the bear trap and that he willingly put it there. Lured on by promises of 1% financing and no money down millions of folks who lusted after owning their own home signed papers without a thought to the future.
Real estate agents and mortgage brokers enhanced their dreams by allowing hundreds of thousands of buyers to falsify mortgage applications. The fireman, policeman, school teacher or any category you might wish to name were fudging their gross pay. All parties to the transaction knew it.
The lure of no or little down payment and a mini-monthly payment (for a while) was too great. The fine print has suddenly jumped into bold and payment amounts will double and triple. That $400/month payment has jumped to $1,200 and the home buyer knows he can’t make it.
What to do?
The bank or mortgage company does not want the house. Sometimes they will accept a lower payment, but many will not. The mortgage maker has stockholders and they want to see a return on their investment. Too bad for the home owner. He is evicted under a foreclosure.
Will lowering of interest rates by the Federal Reserve solve this problem?
No.
Why?
The banking system funded by Wall Street which allowed the low, low down payments and looked the other way on “truth in lending” for applications are now the very ones who insist that all applications be verified. No more hanky panky.
That 1% mortgage may be refinanced at 5, 6, 7% or more, but the owner must now tell the truth. When he tells the truth he will not be able to qualify for a new mortgage so…….foreclosure. Lowering interest rates will not solve anything because there are not enough people who can qualify under the truthful rules.
Joe Sixpack who makes $50,000/year will not qualify for that 3 bedroom, 2 car garage brick house when refinancing is required.
Currently there are more than 2 million vacant homes in the US not counting condos. Because of the millions of mortgages due to be refinanced this year that number could easily double or triple. The reason is more than 20% of all mortgages made during the past 2 years were sub prime and to date 12% are in the foreclosure process.
The Fed will continue to print money out of thin air, but the banks under the tighter regulations will refuse to lend. This credit contraction which will ultimately cause a severe setback in the stock market. When the dominos begin to fall it could easily be a comparison to the decline of 2000. That took 3 years to bottom. There is no way to know how long this might last.
We have not seen the worst of this scenario. Lower interest rates are not the solution.
Al Thomas’ best selling book, “If It Doesn’t Go Up, Don’t Buy It!” has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter and receive his market letter at http://www.mutualfundmagic.com/ add discover why he’s the man that Wall Street does not want you to know.
