Interest Abuse!

ACORN Financial Justice Ideas and Issues International

Buenos Aires      Today’s headlines in the Nacion indicate that the government announced a brand-new program to assist renters to become first time homeowners.  Essentially, the Argentina government is trying to create a secondary market to encourage homeownership.  The early outlines are interesting.  A renter has to prove that they have successfully paid rent for 12 straight months without problems.  Proving that, the renter would be eligible to buy an apartment, house, or condo with a bank loan.  The government is saying that they would guarantee such a citizen 100% of the loan value up to 200,000 pesos and would guarantee 90% up to 300,000 pesos.  On the current conversion rate that would mean a 100% up to $66,667 USD and on the 90% guarantee against default that would be $100,000 USD. 

Right now, and certainly since the “crisis” in 2001 when the Argentine economy essentially crashed, it has been impossible for families to even imagine buying housing, because the market was in dollars, not pesos, and the banks, many of which also crashed, were unwilling to loan.  Even renting is an experience here in which a family (or an office like ours!) is paying a deposit and so forth almost equal to three annual rents.

Will the program work?  Hard to say, because the question is whether this will be enough of a guarantee to lure banks into the market?  The reaction will be interesting.  The news was also careful to point out that the banks would still be charging the prevailing interest rate for mortgages which is 11.7%.  Yes, almost 12%! 

This kind of interest rate usury and impending rate explosion and abuse is the same thing that ACORN’s 130 city report (released this week!) in the United States warned the public and policy makers about.  The escalating dependency of the home mortgage market, particularly sub-prime companies on ARMs (adjustable rate mortgages) which are accounting for 40% of all home loans, means that a crisis is pending for home mortgage payers, particularly lower and moderate income families, when the rate starts to “adjust” from the “bait” level to the “switch” level and rises to 11-12% like we are seeing in Buenos Aires.  And, it could be higher!

ACORN’s report identified ten (10) markets in the United States that were most at risk for interest rate abuse:  Detroit and Flint (MI), Memphis (TN), Jackson (MS), El Paso, Laredo, and Brownsville (TX), Springfield (IL), Birmingham (AL), and Tulsa (OK).  Not surprisingly these high-risk cities are largely in the south and Midwest, but they are also in some of the areas of the country where the lower income families are living, so the danger of predatory abuse from these ARMs is ever present. 

Not surprisingly, though discouraging how persistent the problem, the ACORN report also found that in general African-American and Latino families continue to be caught in this bad business and with higher rates than other families.

What a world!

August 17, 2006

Study Warns of Pending “Rate Shock” for certain homewowners