Servicing Debt, or Getting ‘Serviced’?

Every month, I look at my Amex statement and boggle at the ‘minimum payment’. With such leverage, someone could buy a house, fill it with furniture, park a Mercedes in the driveway, and take off for a few weeks’ vacation on the shores of Lake Como. Would it be a good idea? Only if you’re terminally ill and want to have fun.

Current trends in home loans seem just as foolish. People are encouraged to pay only the interest, nay, even less than that, while being assured that since the value of their property can only go up, it will be no problem for them to refinance or sell. Yet even with such generous payment plans, people are still stretched to the limits. If you doubt, look at the impact of gas prices. Someone who can’t afford a few hundred extra dollars a month to fill their vehicle is unlikely to be able to afford the few thousand extra dollars it would take to actually pay their mortgage once their loans reset.

Prices therefore must keep rising in order to prevent a wave of foreclosures. Any hesitation brings crushing new payments, and a resulting plunge in consumer spending. With most new jobs in this economic “recovery” based on real estate and construction, any hesitation rips the heart out of the recovery.

Perhaps more amusing is that the difference between a normal mortgage payment and the aforementioned negatively amortized payments is still being treated as current income by lenders. That’s a great deal of money that in all probability doesn’t exist. Astute observers of the market will also note that the “days on market” component of MLS listings is being heavily manipulated, as are income figures on “stated income” loans.

Yes, this is something that can only end in tears.

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