Tuesday, July 25, 2006

Delaying the Inevitable
This article in the New York Times confirms what I have been saying for sometime, that people cannot pay their exotic mortgages and need to refinance when the teaser period is over. According to the article the new mentality is that no one lives in a house for thirty years, so why paydown the mortgage, just get the lowest possible payment. This may work for a small number of people, but my guess is that the refinancings are based on an inability to pay the higher rate not a nomadic view of housing. The dollar value of loans subject to adjustment in 2007 will be two and a half times this year's value. The article does not mention the refinance cost - $3,000 to $5,000 per refinance - and how borrowers do not see these fees. Nor does it mention that a house is a great source of wealth accumulation. I would bet that the largest asset of the parents of these over extended borrowers is their house. This is a safety net their kids will not have.

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