Bailout could bring problems
The recent announcement from the Bush Administration that help is on the way for distressed homeowners could bring unwanted consequences.
As more homeowners face foreclosure as rates rise on adjustable-rate loans, the federal government announced a program that would freeze interest rates on many loans. Homeowners who live in their property and are current on payments would be eligible for the program.
However, this bailout could bring along unintended consequences that could hurt the rest of us. The adjustable-rate mortgages that many homeowners opted for are owned by institutional investors around the world who trust in the contractual obligations of investments in the US.
However, if the government steps in to change the rules of the game, it will become harder to attract investors from around the world in the future. The result will be an increase in interest rates as investors clamor for a risk premium to their investment.
Homeowners will be forced to pay higher interest rates as a result of the irresponsible decision of a few.
Many industry experts argue that those who made risky decisions should be held to their obligations, without changing the rules of the game on investors and other homeowners. Others argue that a rash of foreclosures could send the Chicago Real Estate market into a spiral.
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