[DedB]

...ARM(Adjustable-Rate Mortgage) At all? I've never bought any properties all my life. I'm just a student majoring in Economics and am now trying to understand the whole subprime crisis thing.What makes me confused is, why would some subprime borrowers accept ARM(adjustable rate mortages) at all?? Didn't they know it was highly risky? or is it becuz ARMs are always associated with very GOOG terms?(like zero down payments?)Plus, I wanna know why interest rates would go up when real estate market is sluggish?

[Alicia]

There are tons of different types of mortgages out there. Remember, a subprime mortgage is high-risk, so their options might be limited as to what they can get. Also, these people that get the adjustable-rate mortgages are gambling. Many of them were told that if it goes up they can simply re-finance. This is true, normally, howevere when millions of borrowers are late, banks have less funds, they freeze lending, and these people can no longer easily refinance their homes. As far as interest rates go, you will see very soon why this would happen. See, the US is printing an insane amount of money to pay for this stimulus plan and future budgets. This makes the dollar less valuable and harder to sell our debt through treasury bonds. Investing in bonds already isn't a great investment because the interest rates are so low, however since housing commodities like oil, and the stock market is down, it's the most reliable investment out there. But, there is going to be a limit to where we can no longer find willing lenders to lend us money at such a low interest rate. The result is that the Fed will raise interest rates to entice people to buy our treasury bonds. The late 70s is a good example of "stagflation" and don't be surprised if it happens again in the next couple years.