American debt mistakes continue
SUBMITTED BY: Myer RicklessThe U.S. Department of the Treasury has made the same mistake that millions of American home buyers did during the housing bubble of 2002 to 2006: It has taken out an adjustable-rate mortgage on the national debt.
The federal funds rate, which sets the baseline for short-term interest rates in the U.S., was lowered to 1 percent in 2003 and only raised incrementally by a meager 4 percent by 2006. This made abandoning the traditional 30-year fixed-rate mortgage for an adjustable-rate mortgage much more enticing, with the borrower taking advantage of the artificially low short-term interest rates usually for the first five years.
The interest rate would then be reset to the long-term market rate. Since the monthly payment for the first five years would be substantially less than with a traditional mortgage, home buyers were lured into buying houses that were far more expensive than what they could have afforded. Borrowers were only required to show the bank that they could afford to make the initial payments, with some buyers actually earning less annually than a year’s worth of reset payments.
