Risky mortgages threaten a squeeze

The CS Moniter reports:

A great shift toward adjustable mortgages helped push America's housing boom into high gear. Now, as the boom unwinds, the riskier side of those mortgages is coming home to roost.

The ultimate impact of all those "teaser" interest rates, the "no money down" mortgages, and exotic loans where homeowners' debt can rise over time will be muted somewhat, economists say, because it will be spread over the rest of this decade.



But that doesn't necessarily mean the mortgage shakeout will be easy. And for many individual borrowers, finance experts say, the sad result will be foreclosure.

"We just really don't have any precedent to say, 'This is how bad it can get,' " says Rick Sharga of RealtyTrac, which follows trends in foreclosure. "The homeowner who stretched to buy a house in the first place could find himself or herself in very serious financial trouble very quickly."

Economists generally don't believe the soaring popularity of "exotic" or nontraditional mortgages since 2004 will cause the kind of problems that push the nation into a recession. But foreclosure rates are already rising, and federal regulators are moving to develop new rules in a bid to keep banks from making loans to people who can't pay.

At the very least, routine shifts like the phaseout of "teaser" interest rates will crimp the purchasing power of many borrowers, sucking some momentum out of a consumer-led US economy.

It's the down side of what for years has been viewed as a positive trend: Ever-expanding choices in the realm of mortgage financing have helped millions of borrowers and boosted homeownership to record levels nationwide.

In 1990, the last time the nation was entering a real estate slowdown, less than 10 percent of home loans were ARMs, adjustable-rate mortgages. For the first half of this year, that number is 46 percent of the total, measured in dollar volume, says Richard Brown, chief economist at the Federal Deposit Insurance Corp.

What better proof than this that many people really couldn't afford to buy their houses.A homeowner without equity is a renter with debt.