| HappySqurriel said: I started thinking today, that one of the core reasons why the credit market has frozen up is because of the fear of buying bad mortgages that will lose money rather than these mortgages being so bad that they will lose money. Now, if you could eliminate the fear you could get the credit markets operating again and it is possible that the losses will be much smaller than people really expect. |
Nice thought, but the problem is they are bad loans. Most of them as subprime loans on an ARM (adjustable Rate Mortgage). There are two major times you do an ARM. One is if you are trying to flip a house, and don’t expect to own it very long. The other time is when you can’t afford the house you want, and opt for the low payment now, gambling that the value will go up and you can then barrow the difference to compensate for the higher payment that will be coming up in the years to come.
The problem is there will be no money to borrow, as your house did not go up in value. This means while these houses are being paid for today, when there interest rates go up (and they will), they are screwed.
