The road of excess leads to the palace of wisdom. - Wm. Blake

Friday, September 01, 2006

Worse than I thought

It astonished me when I read about people switching to Adjustable Rate Mortgages (ARMs) a few years back, just when it should have been obvious to anyone that interest rates were headed upwards (while I may pay more attention to such things than most, how could any American be unaware that interest rates were sitting at a 40 year low; you don't need to be Alan Greenspan to understand that what goes down must come back up). I know that there was a class of people - first-time buyers, or people stepping up from starter homes that had appreciated enormously - to whom ARMs offered otherwise-unattainable home wealth. But even so, those people were taking a huge gamble - not even a gamble, since no reputable bookie would have given them odds.

What's worse, though, is people who refinanced their perfectly solid, 5.1% fixed-rate, traditonal mortgages into ARMs for existing houses. I went to college in the early 90s, so I have no personal history of mortgage rates, but I understood well that 5% for any kind of stable mortgage is an incredible deal - that 12% was considered a good rate in the late 80s. So what fool would throw one away for something that was, by definition, riskier?

What I hadn't realized, and just learned through Atrios, was that these ARMs (I don't know if it's all of them) have enormous pre-pay penalties - that you are essentially locked-in. Part of the amazing thing about traditional mortgages is that you can almost always get out to seek a lower interest rate, but the bank can't kick you out to charge you a higher one. Instead, we have millions of Americans in suddenly-overpriced homes, falliung behind on escalating montholy payemnts, and with no way out save default.

This is going to get ugly, people.

"[L]ike the neutron bomb," says George McCarthy, a housing economist .... "It's going to kill all the people but leave the houses standing."

PS - And never forget - Uncle Alan told people, at exactly the moment when he knew that he intended to raise interest rates every 6 weeks until retirement, that ARMs were a good idea. The man deserves tar and feathers, if not worse. And I am completely serious about that.


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