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The pay-option ARM, teaser rate and bad credit call to action copy persist everywhere. Despite the new reality we are in, this marketing saunters across our screens like the Emperor's New Clothes.
As any lender would attest, the product available currently is significantly askew from the demand. Consumers, desperate to find solution to their hardship, will act in mass to these promises, only to be disappointed. Although there is much pressure on Government programs to expand their offering, they can currently only benefit borrowers with moderate to low loan amounts.
For a good part of the foreseeable future, there will be a class of borrowers who desperately need new financing, feel entitled to financing, and who will not qualify for financing. The size of the class is scary, and with a credit crunch removing the product for most of these folks, if the data is correct and things don't improve, we may have impact akin to a financial tsunami. The below excerpt and chart (in $ billions) is from Investor's Insight:
"Bernanke told Congress last month that the housing swoon 'will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time.'"
But it will take longer than you might think for that negative influence to decrease. Let's take a look at the following table. This shows the amount of adjustable rate mortgages that reset each month for the first half of this year and will reset for the next 18 months. Note that these reset numbers are a driving factor in the increasing rise in foreclosures. Pay attention to the numbers I highlight in red for January through June of 2008. The largest portion of mortgage resets is not until next year.
The advertising, is adding insult to injury.