More than ten million people will be affected when their adjustable-rate mortgages are “reset” to higher rates, says Mike Whitney of the web site dissidentvoice.org.
The impact in 2007 -- when $1 trillion in adjustable-rate mortgages will reset to new, higher rates -- is that interest rates for homeowners who took the loans will double. The result will not only be an onset of home foreclosures, but Whitney predicts that the U.S. economy will go through chaos as housing markets crash and the population is pushed further into debt.
Whitney says that Alan Greenspan, the former Chairman of the Board of Governors of the Federal Reserve System, is to blame. By introducing extremely low interest rates in 2001, the U.S. housing market grew tremendously, but so did homeowner’s debt. From 2001 to 2005, outstanding mortgage debt went from “$5.293 billion to $8.888 billion,” he writes.
It was “the biggest expansion of debt in history and it was all engineered by seductively low interest rates,” Whitney writes.
Whitney says that the reason Greenspan did this was to keep the economy afloat after the dot-com bubble hit. However, what Greenspan did instead was create a “time bomb.”
When the rates increase on adjustable-rate mortgages, it puts the squeeze on the average American. For many – possibly 1 in 5 borrowers who took a sub-prime loan, according to the New York Times -- paying for their house will just be too much. The direct result will be a large increase in foreclosures, which in turn sinks the housing market, as over-leveraged homeowners will be unable to afford moving into more costly or newly built homes. This in turn undermines the economy, Whitney writes.
Whitney predicts that one of two things will happen in 2007: either the Fed will “lower interest rates and forgo foreign investment ($2.5 billion a day) or keep interest rates where they are and accelerate the collapse of the housing market.” He sees no third option.
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