I come to the defense of variable loans because no one placed a gun to the head of these home buyers. The risk associated with subprime and variable interest loan are the reason for the Housing Crisis which started in 2005-2007. Variable rates were never intended for long term home purchases, but more for developers and investors. Unfortunately mortgage companies pushed more and more first time home buyers into variable interest rates in order to meet the market demands of hedge funds.
One of the major issues with variable interest rates was not the rates, but rather the mortgage brokers that push unqualified buyers into the loans. Many flexible rate loans were offered to home buyers with no income verification or credit qualifications, therefore it is no surprise that many of these homes are now amongst the foreclosed. To the alarm of many home purchasers many of the variable rates increased in percentage only days after the closing on the home.
As a real estate investor I have to come to the defense of variable interest, because the platform works great from short term use. The major issues here is variable rates left the door open for predatory lending, which became the standard policy of companies like Country Wide Home Loans. As a result of the practice of pushing a disproportioned amount of African Americans into variable rate loans, the State of Illinois has filed sue against the current owner of Country Wide (Bank of America).
At some point the home owners who entered into these agreements will have to except responsibility for their own forecloses. Many of the same home owners knew that their mortgages would increase within 18 months, and yet they still accepted the terms and conditions of the loans.
Having said that, I also feel the banks should take the hit for their own bad paper, because they stood to gain the most once the loans were sold to the hedge funds. The cure to the consequences of variable rates will only become obvious once we see the emergence of a more educated consumer.
