Monday, January 05, 2009

The New Developing Subprime Market

We have all heard about the subprime mortgage debacle where many were able to borrow money that otherwise would not have been able to based on “normal” credit scores or ability to repay the low. Most if not all of these types of loans were Adjustable Rate Mortgages (ARM). They start out at a low finance rate for five years and then adjust yearly based on the US Treasury Rate. Generally, the rate five years later is higher than the original rate.

The subprime market was just that, mortgages below prime for five years and then jump to current adjustable rates five years later. These borrowers were approved based on the subprime rate, but would have been denied credit based on their income and debt based on the prime rate which they must now pay.

The U.S. Treasury as of August 2008 had a total debt of about $9.8 Trillion. The cost to taxpayer to finance this debt is over $540 Billion a year! The cost to pay the interest consumes over 45% of every single Federal Income Tax dollar paid. However, in 2008 the US Government decided to borrow $810 Billion to bailout banks, another $700 billion to bail out credit card, student loans and small business. They borrowed even more to do other non government things. The short term good thing is it is at 0 to 0.25% cost. The very bad thing is this new debt comes due in five years. What will the U.S. Treasury Rates be like then? Will the national debt have risen to $20 Trillion? Will interest rates rise back to 5% or will they be 10%? At 5% the cost to the taxpayer would be over $1 Trillion a year. This would consume nearly every single penny we pay in federal income taxes. We as a nation will either have to default on the debt or raise taxes by 100% while cutting all discretionary spending.

To make it more personal the cost to each family, each year, could be $10,000!!! AT 10%, the cost could be $20,000 per American Family each and every year and this does not include paying ANY PRINCIPAL!!

Is this any different than the subprime mortgage market? How can the US government be treated any different than any other entity when it comes to credit worthiness?


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