Another Day Older And Deeper In Debt

Folks, the worst is yet to come. Much of the economic "growth," such as it was under Bush, that occured happened because of the "wealth factor": flush with cash from interest-only payment mortgages with adjustable rates, which took advantage of the ridiculously low prime rate, as the Fed tried desperately to correct Bush's policy blunders, consumers would spend, spend, spend, rather than put aside a portion of the principal due on the mortgage (or heaven forbid, even just save a few bucks!)

Why? That's a good question and sociologists all over the world will be analyzing this for centuries, I fear. My gut instinct is that marketing has, in fact, become TOO good and is overpowering any common sense the average consumer might have. Advertising all over, from the Net to TV to radio to the stupid temporary ads taped down on crosswalks, all tell you you're a bad person for not buying "X."

Well, people are plum running out of money now.

WASHINGTON (Reuters) - During the recent U.S. housing boom, mortgage lenders touted so-called exotic mortgages that allowed people to buy houses they could not otherwise afford. Now those lenders are bracing for the not-so-happy story of borrowers like Jesline Jean-Simon.

The Miami woman bought her two-bedroom condo a year ago on a 3 percent adjustable rate mortgage with flexible payments.

When home prices in the city were blasting off two years ago, Jean-Simon was sitting pretty.

But now prices have eased and she works three jobs just to manage a mortgage that has ballooned into interest rates of around 10 percent.

You read that correctly: her mortgage interest alone went up 333%! Worse, she probably won't be able to sell her home and recoup her principal (and mind you, the loss on the sale of a home is not tax deductible, although if you were a corporation selling its "home," it would be...that's fairness for ya!)

So she's screwed either way.

A mortgage survey due on Wednesday is expected to show that more and more Americans are in danger of losing their homes. The quarterly report from the Mortgage Bankers Association is also expected to show that the same mortgage products that helped send the housing market into the stratosphere are now weighing homeowners down.

In a hint at Wednesday's data, October saw more foreclosure actions than any other month this year according to RealtyTrac, an online marketplace for foreclosure properties.

A foreclosure, for those of you who are fortunate enough not to worry about this, is when the bank takes your home from you because you can no longer afford to pay for it, because part of the mortgage process is to sign ownership of your home over to the bank until you have satsified the debt.

Interest-only mortgages are a recent development in the lending process and increase the risk of default. You lower your monthly payments, which means you can afford more house (a bigger mortgage) than someone who has a traditional "interest plus amortization of the debt" mortgage (which allows you to pay off your house faster).

You would take an interest-only mortgage under two conditions: first, that you believe you will be making more money in the future than you are now, or if you believe you will move before the mortgage come due (requiring you to pay off the entire balance somehow) and will have enough residual value in your house to pay the mortgage off.

Neither prospect looks particularly encouraging at this point, however, as the housing market is not just shaky, but practically trembling under the weight of too much product and not enough demand. Housing prices, impacted by the lack of demand as boomers trade down, and impacted by rising interest rates, meaning people can afford less house, are plateauing and even beginning to slip downwards.

Which will be tragic for the economy of the United States, and by extension, any economy that has significant stake in the American economy, such as Treasury bondholders like China and England, or trading partners like Canada and Mexico.

2007 is shaping up to be a critical year in American history. This year was merely prologue.