In several metro areas last year (notably southern California, northern California, south Florida, the east coast and, strangely, Salt Lake City), more than half of all people purchasing or refinancing homes used pay-option ARMs, interest-only loans or other types of exotic mortgages to complete the transaction. In Atlanta, and plenty of other places, just half of all people buying or refinances used exotic mortgages.

The Federal Reserve Bank opted to leave the short-term Federal Funds rate where it is for the moment, a pause after 17 straight interest rate hikes. Bernanke says that inflation is still a risk. But the risk of personal economic disaster is, in many cases, higher:

  • One third of all adjustable rate mortgage (ARM) loans are going to adjust this year. They could adjust by a few bucks or a few hundred dollars per month. Nearly 12 percent of those with sub-prime credit are late paying their mortgages. This number is only going up.

  • My guess is that many of those who used pay-option ARMs or other forms of negative amortization loans (where you’re paying 1.99 percent instead of the going interest rate and the difference is added to your mortgage balance) don’t understand them. When those monthly payments double or triple (in some cases), homeowners may be stunned all the way into foreclosure.

  • Home sales are down 8.9 percent from last year. The inventory of unsold homes is up an average of 40 percent (but much higher in some areas). If you’re trying to sell to get out from under an affordable loan and you’ve only owned your home for a short period of time, you may find that prices have dropped and you will have to sell at a loss.

  • Which brings to mind the problems with short sales. That’s when you sell for less than the mortgage balance. You have to get the lender to agree to take less. Then, the following April 15th, the IRS will hit you for income taxes on the “phantom income,” that is, the difference between what you owed to the lender and the amount it was willing to take. Search for information on short sales.

  • This month, the government reported that for the first time EVER, household debt exceeded income. That includes consumer credit (non-mortgage loans, a/k/a credit card debt), which rose to $10.27 billion. According to the Fed, the surge is triple what experts and economists expected. Individually, we owe about 108% of our annual income.

For an interesting perspective on credit and debt, read Newsweek’s article this week, a conversation with Christian Weller

August 9, 2006