Monday, May 29, 2006

The Maestro: Gone But Not Forgotten

Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.

American homeowners clearly like the certainty of fixed mortgage payments. This preference is in striking contrast to the situation in some other countries, where adjustable-rate mortgages are far more common and where efforts to introduce American-type fixed-rate mortgages generally have not been successful. Fixed-rate mortgages seem unduly expensive to households in other countries. One possible reason is that these mortgages effectively charge homeowners high fees for protection against rising interest rates and for the right to refinance.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

Alan Greenspan 2/23/04

In the suburbs of Dallas, Bridget Edwards comes home to uncertainty every day. She and her husband, James, are four months behind on their mortgage.

"It's been just like a roller coaster," Bridget says. "Our payments have been just up and down."

Up and down, from $1,300 a month to more than $2,000

The reason?

"We have an adjustable-rate mortgage," she explains. "I really didn't know it would change like this."

Today, foreclosure looms over their $129,000 home. That’s a problem facing a growing number of Americans, who are finding themselves one crisis away from financial ruin. RealtyTrac, an industry organization that maintains a nationwide database of foreclosures, says mortgage defaults between January and March of this year numbered 323,102 compared with 188,122 during the same period last year — an increase of 72 percent.

"I am sad. I'm angry. I'm confused," says Bridget Edwards.

NBC News 5/25/06


Blogger Jimmy the Saint said...

I thought I read approximately a year ago where Greenspan was encouraging people to take out a variable rate mortgage. I forgot the stupid reasons he gave, unless it was to benefit the banks. At the time, I thought Greenspan was off his rocker. I knew that rates had nowhere to go but up. Just went to show that Greenspan is no friend of the American consumer.

5/29/2006 2:11 AM  
Anonymous Anonymous said...

I find it hard to feel sorry for folks who signed on to one of these morgages at the exact moment they should have been signing on for a fixed rate or at the least reading the news enough to see the looming interest rate hikes.

5/29/2006 11:09 AM  
Anonymous Anonymous said...

to anonymous ... you obviously live within the higher income bracket. ARMS were about the only way many people would ever be able to buy a house and real estate people along with banks, being the ethical bunch that we know and love, pushed these people into instruments that would insure their commissions.
Most people realize that paying rent is flushing money down the drain ...
Can you see the lure???

5/29/2006 3:06 PM  
Anonymous Anonymous said...

Most people realize that paying rent is flushing money down the drain ...

Except when it's not.

Like an absurdly high ratio between housing prices and rents.

And then there's property taxes, low interest rates reducing the value of a tax deduction on a mortgage, property maintenance costs, and oh, the AMT further reducing the tax deduction value of home ownership.

The total cost of home ownership is a lot more than sticker price.

The delta between rent and total home ownership cost can be used for this radical concept I've decided to call "saving"

If the only way you can buy something is a risky loan, perhaps you can't afford it.

5/29/2006 4:32 PM  
Anonymous Anonymous said...

Greenspan did a real disservice to the public when he made those statements.

For the avg American, with the avg job, knowing you can keep the roof over your families head is priceless. With all these McMansions and creative mortgage products that are being sold, I bet down the line we'll be hearing a lot of horror stories. But one person's loss is another's gain, just as it is with any asset class. As repulsive as forclosure is, no one forced those people to take those morgage products.

Personal accountability, education, doing your own homework, full disclosure, and legal action against those that break the laws, is the answer.

imho, the national real estate association is ruining things so they can maintain their intermediary power, income, and manipulate the market. They lobby states to create laws to increase their power, and block new creative ideas like buy In most cases there is no reason a person could not sell their own home. But the agents, wanting to maintain their 6% commission (regardless of market prices), will try to convince you otherwise using scare and sales tactics. They are shameless. The real estate profession needs some good old healthy competition.

Except when it's not. Absolutely agree!

5/29/2006 5:25 PM  
Anonymous Anonymous said...

i agree with anonymous ;-)

5/29/2006 5:43 PM  
Blogger knobboy said...

Ahhh yes. The Hybrid ARM. Lotsa folks with these things are going to be in for a rude awakening in the coming months. Rocky Mountain News (05.13.06):

"Thousands of Denver homeowners gambled on adjustable rate mortgage loans three years ago.

Now those bets are coming up short. These homeowners are facing the hard truth that their ARM mortgage payments are going up several hundred dollars more each month as their rates adjust skyward."

Those ARMs starting to hurt

"An estimated $2 trillion in home loans nationwide is expected to adjust upward in 2006 and 2007, according to Moody's, a research firm based in West Chester, Pa."

Chicago Tribune (05.28.06):

"'The increases we've been seeing in foreclosures don't even reflect the worst-case scenario that could happen when the $2.7 trillion in adjustable-rate mortgages are reset over the next 18 months,' said Rick Sharga, vice president of marketing at RealtyTrac."

Mortgage defaults on rise

5/29/2006 9:46 PM  
Blogger Jason said...

I can't really add anything else beyond what is already listed above. ARMs are great when rates are low, but are the devil when they are changing. Too bad so many people were so eager to own a home even on the prospect that their rates could change. Sure, the average person lives in a home for 3 years, but in 3 years rates can change dramatically.

5/29/2006 10:40 PM  
Blogger Cartledge said...

A can tell you that as an Australian I was in the adjustable-rate mortgage trap,
Why trap? Because lenders tended not to gamble on a fixed rate. It was usually set significantly higher than the common alternative.
Fixed term investment, on the other hand, was penalised with a lower general return, depending on the length of the contract.
The consumer is really dictated to by the corporations.

5/29/2006 11:42 PM  
Blogger DED said...

Back in 99, we used an ARM to buy our home. Fortunately, our gamble paid off. Once 30 year fixed rates dropped to the level we wanted, we refinanced and locked in. It's all in your timing.

5/30/2006 10:39 AM  
Anonymous Jim said...

I'd agree w/ Deb,its all in the timing, we had the opportunity to get an ARM in Oct 99. I was single income about to get married (fiancee still in school) and was scared we'd get bit in the butt. So I went w/ a fixed. Probably cost us a few thousand over the 5 years we owned the home.
Funny thing is this article is about Dallas, where I live. Collin County, just north of Dallas proper had the most foreclosures in the 1st quarter than ever before, and I think we were close to #1 in the country. Lots and lots of mcmansions w/ two SUVs in the garage here. Lots are getting their just desserts for not saving and taking out either ARMS or those stupid interest only jobs.

5/30/2006 6:28 PM  
Anonymous Anonymous said...

Uh, $2K/mo on a $129K home?

Assuming it's 100% financed at 30yrs, that's over 18%. Who's their lender, Tony Soprano? Either they lost a HUGE amount of value in their home, or they've got a hell of a lot more colorful story to tell that what's been quoted such as holding a 5yr mortgage or something that effectively renders the anecdote as totally worthless.

Regarding the benefits of ARMs to help new homeownership - yeah, that's true, to a point. When 30yr fixed dropped into the 5.x% range, ARM holders not planning to move immediately that didn't lock in were simply idiots. ARM rates weren't *that* much lower, and if you couldn't swing a 6% rate, you had no business at all holding an ARM that was almost certain to hit that rate in short order.

In most inflated housing markets where people are feeling pinched, rents are *way* off baseline. Here where I live I could rent a 3BR house for around $2300, but it's almost $800,000 to buy that same house. Current ARM rates and 20% down would still leave you a grand per month above that. If buying is that tight that you need some interest-only loan, you really are way better off renting.

5/31/2006 4:17 AM  
Anonymous Anonymous said...

I've had an ARM since 1993. It has been one of my better financial decisions. I didn't plan to hold it this long but the market worked to my advantage. Take the time to do a little forward planning--for some it is a good decision.

5/31/2006 9:21 AM  
Anonymous Anonymous said...

The Treasury dropped the interest rate on I Saving Bonds from 6.73 to 2.41. So are they saying there is no inflation? So what's the big deal with the ARM?

5/31/2006 1:50 PM  
Anonymous Anonymous said...

This today from the Federal Reserve minutes:
"Certain features of recently popular nontraditional mortgage products had the potential to cause financial difficulties for some households and erode mortgage loan performance for some lenders. "

Gentle Ben tiptoed around the subject avoiding any specific reference to "adjustable rate mortgage." Lest the Maestro eat his words.

6/01/2006 12:43 AM  
Blogger Wild Clover said...

We had to get an ARM-our only other option was a fly=by=night company at twice the rate. But ours was capped-can't go over 8%, and not having a McMansion, the top $ was not going to be more than rents in the area. Yeah, maintainance costs are a bitch, but we also don't have a landlord who can decide to kick us out because thay want to rent or sell to their cousin. Anyone who picked up an ARM without a cap was/is an idiot. Remember "balloon" mortages? One of those would have killed us when I became unemployed about the time a traditional balloon would have kicked the price up.

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Blogger Angela said...

I also prefer fixed rate mortgage. The key selling point of a fixed rate mortgage and even in case of bad credit mortgages have always been payment security. You know that the rate you will pay for your mortgage will stay the same for the pre-agreed term, normally two, five or ten years. So whatever else happens to interest rates and the economy your monthly mortgage payments won’t change. This is what makes fixes such good choices for first-time buyers or anyone else stretching to climb up the housing ladder.

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