Adjustable Interest: Still A Big Problem


Between 2001 and 2007, “Adjustable Rate Mortgages” were sold by predatory lenders like Countrywide, who profited quickly by pocketing high closing costs, and then by promptly selling their Notes to Fannie Mae or Freddie Mac, so they could recoup their principle. When unsuspecting borrowers later faced significant interest rate increases, millions found themselves unable to pay, and fell into default. While mortgage foreclosures grew at a galloping rate, the crisis turned into a housing sector depression. As fair market values fell precipitously, millions of homes took on the label of being “underwater,” because their mortgage balances exceeded what could be realized in an arms-length sale.

Even though “adjustable rate mortgages” and “interest only” loans were a major contributing factor in the 2008 housing collapse, they are still used today, because wealthy financiers continue to purchase the votes of House and Senate members, and this keeps Congress from banning usurious lending practices. Despite the best efforts of Democrats through the Dodd-Frank Bill, variable rate mortgages are not eliminated, and are not even regulated.

There was a time in America, however, not so long ago, when “variable interest rates” were not allowed, and relatively low caps were set on “fixed rate mortgages.” Historically, each state had laws that set maximum interest rates. After the United States was formed, most states limited interest rates to no more than 6%.

During the right-wing Reagan Revolution, conservatives started pushing de-regulation as to nearly everything, including interest rates. When South Dakota completely eliminated their cap on interest in 1978, many credit card companies relocated there. With the approval of a conservative U.S. Supreme Court, they started charging unlimited sums of interest under South Dakota law, even though their credit cards were being used in states that had caps.

The loss of control on interest rates got another boost under the federal Depository Institutions Deregulation and Monetary Control Act, which exempted federal banks from state usury laws in 1980.

Before the reckless Reagan Revolution, the country had witnessed a great expansion in housing after WW II, during the 1950s and 1960s, when banks and savings and loans were limited by law to using only “fixed rate mortgages” with capped low interest rates. Payment schedules remained unchanged for 15 to 30 years, and there were no spikes or adjustments to throw buyers into default.

While Wall Street banks make billions from variable interest rates, they are nowhere near as good for consumers as fixed rates. The absence of caps on the amount of interest that can be charged, only leads to unnecessary profit-taking, and many hardships for the millions of victims who lost their homes in the crash of 2008.

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