The Economic Stimulus is Great for Stimulating the Growth of Big Government, Not the Economy

As the sub prime Adjustable Rate Mortgages (ARM’s) began to reset higher. in 06- 08, defaults began.

The steady climb in home prices slowed , then stalled as the economy floundered.

Sub prime ARM borrowers no longer had the automatic option of selling at a profit, or refinancing and pulling out equity for living expenses and new real estate purchases.

As real estate continued to decline, more and more people found themselves “under water”( their mortgage balance was higher than the value of their house) Many of these people chose to default, simply turning in their key and walking away from their obligation, amid their home.

The value of the derivative insurance instruments  declined, exposing the dubious value of  this form of collateral.

By the end of 08, most of the sub prime ARM’s had reset, dragging the markets into a precipitous crash, and leaving the banking system on the verge of collapse.

The unprecedented infusion of $ hundreds of billions, in TARP funds, put a temporary halt to the free fall, and helped to stem the panic in the banking system.

There is a second ARM problem, which is not considered sub prime, but appears to be a much bigger disaster because of the timing.

ARM’s for non sub prime purchasers has been a mortgage tool utilized by home buyers and lenders for many years. It is a method for giving  first time buyers or recent graduates and newlyweds a means of purchasing a home while they establish their career and earnings levels.

When home prices began their steep rise in 2002 and 2003, lenders utilized the ARM  with a wrinkle to help credit worthy buyers purchase homes that were   larger  and expensive.

The new wrinkle in the prime ARM’s is designated AltARM’s.

An Alt ARM is a mortgage loan where the borrower chooses what payments he will make for the first 5 or 6 years.

Interest only loans, or even less than interest, delaying all additional payments until after the mortgage adjusts.

This enabled credit worthy people with careers that appeared to be on the upswing, to purchase larger more expensive homes, to live the life style of their contemporaries, to purchase above their means.

The recession and job market shrinkage along with the massive losses on Wall Street have put these Alt ARM’s at great risk, and the derivatives insuring them in a very precarious position.

These Alt ARM’s are scheduled to begin adjusting in the Fall of 09, with the heavy resetting beginning in the Spring of 2010, and turning into a tidal wave through the end of 2011.

These are former Yuppies, and middle to upper middle class  successful people who lost jobs or a career due to the recession/depression.

That is a disaster in waiting, and the disaster is being ignored by our instant gratification politicians.

Perhaps they should see an eye doctor.

What a mess!!!!

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