Tuesday, May 03, 2005

Opinion - May Rant #3

Inflation is too low. With real interest rates this low, no one is making interest income. Inflation has to go up so interest rates will increase so interest income grows. Those that rely on interest income have had it bad (unless you are a credit card company and then, your rates have nothing to do with inflation so who cares). What would be the impact of higher rates? Recognizing for a moment that step-wise increases the Fed has imposed....

From : Freddie Mac http://www.freddiemac.com/news/archives/afford_housing/2005/20050429_dc.html

  • Specifically, in 1997 2.4 million working families spent more than half their income on housing, but by 2003 this number had grown dramatically to 4.2 million. This comprehensive study also compares immigrant working families to their native-born counterparts and reveals that immigrant working families are 75 percent more likely to pay more than half their income for housing. Working families are defined as low- to moderate-income families that work the equivalent of a full-time job and earn from the minimum wage of $10,700 and up to 120 percent of the median income in their area.


  • Through November, ARMs accounted for 34 percent of the conventional purchase-money market in 2004. This marks the highest annual share since 1994 when the ARM share was 39 percent. The highest annual ARM share occurred in 1984 at 62 percent, the same year Freddie Mac began its Annual ARM Survey.
  • Over the last several years, annually adjusting ARMs with an initial "fixed-rate" period of more than one year, known as "hybrid" ARMs, have grown in popularity. According to the FHFB data, hybrid ARMs accounted for the majority of purchase-money ARMs by 2002. Within that product type, ARMs with an initial fixed-rate period of five years, known as "5/1" ARMs, have been the dominant choice of consumers. "In 2004, two-of-five ARMs, and three-of-five hybrids, were 5/1 ARMs," commented Nothaft.
  • "Hybrid ARMs provide the consumer the comfort of knowing that the interest rate will be fixed over the first five years of the loan. However, the interest rate may jump as much as five percentage points on the fifth anniversary. Thus, the product has been popular with families who plan to have the mortgage for five years or less," Nothaft observed.
A client recently complained that her mortgage company raised her payment, she wanted to know if they could do that. Well, yes. Turns out she had an ARM and after 3 years, her rate could go up...from 5.75 to 8.99%...a 37% increase....already in a chapter 13 bankruptcy, she will be moving this summer after the foreclosure is completed.

Over 20,000 people in Wisconsin were foreclosed on in 2004. It is not slowing down. And as those ARMs purchased in 2001, 2002 and 2003 come due for their adjustment rate, the percentage of people already over 50% of their income on housing is going to jump and so will foreclosures....

Oh, yea, but the way....did you know that credit card companies will have to raise their minimums later this year? Effectively doubling them....care to consider what the impact of that will be on minimum paying consumers?

The new bankruptcy law takes effect on October 17th.....to use a marketing phrase..."what's in your wallet"

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