mortagesandforeclosures

by Amber E. Schaller

There has been a major upheaval in the world of lending and home loans. What can we imagine wil happen? It is important to make an intelligent guess about how interest rates will go.

Tight conditions in the mortgage world should normally lead to lower rates, since banks would have to lower rates in order to attract customers with good credit ratings. But it sems that banks are actually raising rates, in the hope that will improve their revenue.

This seems like a poor business decision; normally a business will lower prices when business is bad so that they can get whatever business they can. This shortsightedness is not limited to the mortgage industry; credit card companies are doubling and even tripling their rates in response to defaults on the part of customers in this dire economic environment.

In the good old days, a slowdown in the markets would usually mean a decrease in interest rates since banks would try to attract more customers with attractive rates. Matters are not like they were before, though, and new rules seem to be in order.

How should a borrower view this crisis, and what things should he be doing? Is it better right now to wait out this odd phase, in the hopes rates will fall back down, or take advantage of whatever credit is avaible before the economy gets worse?

Some economists are not only forecasting a recession, but even a depression, with deflation instead of inflation. Deflationary tendencies normally mean lower to even negative real interest rates, and that would mean borrowers ought to wait a bit longer.

Some banks are still actively seeking borrowers. Many small lenders never had the capacity to delve into the massive home loan programs that many of the bigger banks did. Some were simply too small to take on dangerous loans.

A second supporting argument for waiting is that housing prices continue to plummet, with predictions of futher price cuts of as much as 35%, even after the 20 to 25% decreases already seen. A study of housing prices conducted by researcher Case-Schiller indicates an average decrease of 17%, but some areas with home prices falling 25%. If the scenario is set not only for lower rates, but also for lower home prices, it would seem wise to wait until more of the credit crisis fallout can be judged.

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