Monday, October 17, 2011

THE TRUTH ABOUT FLEX LOANS:

Much has been written and said about Flex loans - ARMs - in the wake of the financial crisis. Often the popularity of these loans - featuring interest rates that trade much closer to the market rate - has been one of the scapegoats for the Housing Bubble. ( The real problem was reckless lending practices...) And lately a reform of this market has been high on the list of moves politicians have been floating to protect financial markets.


A recent study had revealed that homeowners who have had short term flex loans since 1997 have saved 29% (total payments + reduction of debt) as compared to a homeowner with a fixed mortgage over the same period. This saving multiplied by the significant market penetration of these loans translates into a huge net loss of income for banks, mortgage brokers, and bondholders. Millions of homeowners have had more efficient access to capital = more disposable income for homeowners and less easy profits for banks. Maybe that explains why politicians want to roll back these financial instruments: they want homeowners to finance the resotoration of the Banking Sector.

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