Wednesday, August 23, 2006

Adjustable Rate Mortgages Kept at ARM's Length

The housing bubble has burst, according to an article by Bill Fleckstein on MSN Moneycentral. While he spends a lot of time patting himself on the back about how he 'told us so', I agree with his general thesis: That too many people overborrowed, took unconventional loans and now with rising rates, the piper's come a'callin'.

He cites a particularly nasty example:

It begins with the story of a Detroit accountant who was looking to lower her monthly payments. In 2004, she refinanced a $312,000 mortgage via an option-adjustable-rate mortgage that offered various payment choices, as do so many of these plans. Her (introductory) rate of 2.3% is now up to 8.75%, and her loan balance has grown to $324,000. She claims that the terms weren't clearly spelled out. But if she actually read the documentation, as accountants often do, and didn't get it, you can imagine how many people truly understand their mortgages. (Hint: The number rhymes with "hero.")

Taking a bit of a tangent on the above example, one is led to wonder how many lawsuits we're going to see from hapless homeowners claiming that 'they didn't know' what it really meant to have an ARM (adjustable rate mortgage).

My wife and I, in a recent attempt to consolidate a little debt and lower our housepayment were offered an ARM. The broker was very honest, didn't try to sell us something, and explained all the terms very carefully. I'm not a financial whiz, but even without his explanation, I wouldn't get near an ARM if you paid me. I always feel that the better bet is to take a fixed rate mortgage, and if interest rates go down significantly, refinance and accept the up front costs.

All of this leads, of course to a word we haven't heard in years: Stagflation. Anyone remember the Carter years when the Keynsian economists of the time were confused because the economy was slowing at a time when inflation was heating up? Something that in the Keynesian view was never supposed to happen.

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