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May 04, 2004

I O U, U O Me, We're One Happy Family

Quote of note:

The new loans go well beyond adjustable-rate mortgages. They include interest-only loans; "no document" loans, which allow people to borrow money at higher rates without proving their income or assets; and "no ratio" loans, which simply ignore a person's monthly income.

Oh, yeah. The reason for the post:

Regardless of when it happens, economists predict that a significant rise in interest rates will come as a jolt to many people. Those with home equity loans will see their monthly payments climb almost immediately. Adjustable mortgages will increase more slowly, because many borrowers lock in rates for several years. But monthly debt burdens will eventually rise.

In the meantime, housing prices could drop sharply in some overheated markets like New York and Southern California, where many homes have doubled in price over the last five years. People who bought their homes with no money down could find themselves unable to sell without owing money to their lenders.

As Household Debt Rises, New Risk in Higher Rates
By EDMUND L. ANDREWS

WASHINGTON, May 3 - Philo Thompson is 28, single and - like many other Americans these days - not afraid to stretch when it comes to buying a house.

A management consultant in Denver, Mr. Thompson bought a $500,000 townhouse last Friday in the suburb of North Cherry Creek.

As many other first-time homeowners have done, Mr. Thompson put no money down. Instead, he took out a first mortgage for 80 percent of the purchase price and paid the rest by taking a home equity loan against the new house. To reduce his monthly payments, and to qualify for a big enough loan, he took out an adjustable rate mortgage that requires him to make only interest payments.

People like Mr. Thompson could get squeezed if interest rates start to rise. With economic growth looking strong and hints of inflation in the air, Federal Reserve officials have made it clear that the era of extraordinarily cheap money is slowly drawing to a close. Yet Mr. Thompson betrays no worries.

"I'm too young to be scared," he said last week, betting that both the value of the house and his income will keep rising. If the bet fails, he said, it will not be the end of the world, adding: "There is a difference between being poor and being broke. Being broke is more of a temporary condition. Donald Trump has been broke a couple of times."

Mr. Thompson is not alone in such thinking. After a three-year period when the Federal Reserve cut interest rates to their lowest level since 1958, Americans have become far more willing to load up on debt and banks have become far more willing to let them.

Household debt climbed at twice the pace of household income from the beginning of 2000 through 2003, according to data at the Federal Reserve. Enticed by low interest rates, Americans took on $2.3 trillion in new mortgage debt during that period - an increase of nearly 50 percent. Consumer credit, from zero-interest auto loans to the much more expensive debt on credit cards, climbed 33 percent, rising to $2 trillion in 2003 from $1.5 trillion in 2000.

Posted by P6 at May 4, 2004 05:20 AM
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