Bush vs. Greenspan on ARMs

President Bush, today: "One of the most troubling developments has been the increase in adjustable rate mortgages that start out with a very low interest rate and then reset to a higher rate after a few years."

Alan Greenspan, as reported by Business Week in April 2004: "No less an expert than Federal Reserve Chairman Alan Greenspan has sung the praises of ARMs. In February (2004), he told credit union executives that such loans could have saved many homeowners tens of thousands of dollars over the past decade. He noted that ARMs are much more common in other countries, and he encouraged the mortgage industry to create more options. 'The traditional fixed-rate mortgage may be an expensive method of financing a home,' Greenspan said."

Our take: (This is a joke, folks):  It could be that Greenspan was confused, or deceived about ARMs. Perhaps he had no idea that they sometimes lead to higher mortgage payments.

Your thoughts? Comments? Insights?

Comments

[sheila]

pardon a comment that is a bit political, but the answer is very likely political, so it's hard to avoid.

bush has been extremely adamant that nobody see or absorb the ENORMOUS financial consequences of his exploits on behalf of his cronies, the War Profiteers, all on the taxpayer's dime. had we paid-as-we-went for the egregious and irresponsible spending policies of the past 7 years, we would have all been dead broke, the economy would reflect the truth of our situation, and we would have DEMANDED an end to his pillaging of the treasury. in other words, he is the ULTIMATE irresponsible borrower, relying on some future miracle to bail out his greedy, corrupt policies (mostly the miracle of him being out of office, despite the efforts of the Supreme Court, Bechtel, and various partisan election officials who have artificially put him in office and kept him there). his legacy will be a broken country in every sense of the word.

alan greenspan is, and always has been a complete toady, and whored himself out to bush to create this bubble, this TOTALLY false sense of "prosperity" and "strong economy," which was really all a pyramid scheme. his pronouncements mirror the white house's, and encouraged irresponsible spending by consumers at the exact moment we were all also irresponsibly spending as taxpayers. so, instead of us feeling the crush of the downward spiral of the dollar, the trillions in deficit spending, the degradation of our infrastructure and the off-shoring of all our jobs and our national debt being owned and manipulated by China, all we felt was the giddy excitement of getting rich quick without working. in other words, we were him for a day.

and look who is sitting at the top of the pyramid, laughing down as the peons scramble around, blaming immigrants, muslims, countrywide, kate, and others for their situations. the new class of uber-wealthy robber barons. mission accomplished, indeed.

[Mary G.]

In Greenspan's defense, he may have been talking about a more vanilla-type of ARM. There are many types of ARM's, including the two year teaser rate where the interest in tacked onto the principal of the loan, and you don't make a dent in gaining any equity unless your property does increase in value. And then, you still have to refinance at the end of the two years to pay off the original principal value, plus the interest accumulated. He also wasn't taking into account piggyback loans that covered 100% or more of the purchase prices of the home. Plus, he was speaking in an environment of low interest rates, not just at the Fed, but due to worldwide liquidity (which backed all the paper being issued for those exotic mortgages, since people were buying all those papers).

[jemarqu]

George Bush said. “See, it's easy for me to stand up here and talk about refinancing -- some people don't even know what I'm talking about. ”

Before I get bashed by conservatives here. I just want to say for the record, regretfully I voted for Bush in both elections. I am also a life long Republican.

Does Bush think Americans are stupid? If so he is mistaken. Americans are not stupid, just greedy. As a matter of fact most Americans believe the real American idiot is in the White House.

I cannot believe both party's leaders are constantly giving speeches on how Americans were swindled by the evil mortgage brokers. Do politicians believe that Americans are not capable of making their own financial decisions?

[MyLessThanPrimeBeef]

Woa, I just checked my One Dollar Federal Reserve Note and saw something I never saw before, right above the pyramid, it said: A Fool And His Money Are Soon United!

[Cal]

To encourage people to use ARMs during a time of historic low interest rats is stupid, if mortgage rates were 15% then an ARM makes sense (much more likely to adjust down than up) but when you could get a fixed for 5% it simply doesnt make sense to get an ARM, its not like interest rates would get much lower and have a very real risk of going much higher.

[Rob]

Sheila: Hemp rash out of control today? Not sure which part of left field your ranting from, but again you need to stick to the topic. Please. I feel like I just took a sip of water off a fire hydrant...

Was Alan Greenspan President Clinton's Toady as well?

[srla]

Yes, Sheila, Bush is indeed an evil mastermind. He's just really good at PLAYING dumb. (Now if that were true, somebody ought to give the guy an honorary Oscar, because he has that role nailed.)

I do agree that the bubble was sustained and enabled in order to avert a recession after 911, but I also believe the shortsighted fools actually believed it was the prudent course for the country. But, as with their war policy, the administration clearly had no exit plan once the bubble began to inflate.

Just because I can't think of a single thing the guy has done or supported that I actually agreed with doesn't mean I'm ready to proclaim him to be the grand wizard of the military-industrial cabal. He's just an incompetent leader who places far too much weight in personal conviction and far too little in logical analysis.

And I'm not sure what you were implying with the Muslims/immigrants bit, but Bush and his fellow "free traders" have all clearly been in the pro-illegal immigrant camp, and why wouldn't they be? The analogue of exporting manufacturing jobs is importing cheap labor to fill the service jobs (you know, those remaining jobs they can't outsource).

The so-called "free trade" party line remains that exporting manufacturing jobs to markets with lower cost labor and importing people willing to work for less in the remaining domestic jobs will, in turn, lower the costs of living for Americans, and that it has.

Of course, this process also dramatically suppresses wages and eliminates jobs of the middle and working classes, begging the question that, if the "free traders" continue to get their way unchecked, who but the wealthiest will eventually be able to afford to buy ANYTHING?

[Rob]

Hmm, do we have the posting filter set to high or are we just holding back here?

[Roger Moore]

I think that Bush and Greenspan are talking about different things. Greenspan is talking about ARMs in general, and they can be a good thing. Orthodox economic theory suggests that they will, on average, have somewhat lower overall interest rates than fixed rate mortgages. A buyer who can afford to pay even if/when the rate goes up will probably get a better deal with an ARM than with a fixed rate. Avoiding ARMs deprives those borrowers of the opportunity to save money.

Bush is specifically talking about the 2/28 ARMs. Teaser rates may make sense for financially savvy speculators, but they're obviously bad news for ordinary home buyers. Given how irresponsible the banks were in offering 2/28 loans, it might be better to rein them in.

[brian]

ARMs are not as much a problem compare to the Government willingness to promote the economy by allowing people with MAJOR credit issue to buy homes with little or no down payment. One can gather by examining Fannie Mae and Freddie Mac mortgage buy-back policies. Clearly, these trouble borrowers do not present a responsible behavior when it comes to credit and finance. Those of us who have experienced the early 90s Saving & Loans Crisis and Real Estate downturn would have seen this coming.

I believe this economy promotion is a deliberate cover up to the on going war. If economy is good, fewer people will complaint about the invasion of Iraq.

[Jeff]

FHA Plan:Bring a water gun to fight a fire.
http://thegreatloanblog.blogspot.com

[difference between a wife and a girlfriend: 55 lbs.]

What we have here is the baby alligator brought home because it was so cute; now, that alligator ain't so baby nor so cute. And, it is no longer possible to quietly flush it away. Under the cover of darkness, its time to leave it in someone else's back yard pool.

[John K]

Sheila,

I agree Bush is way over his head as president. He will be ranked in the lower percentile of presidents for many decades if not hundreds of years. However I don't think this mortgage mess is he fault at all; neither was the tech bubble president Clinton's fault. Both benefited from the good times -- increased capital gains and higher consumer confidence -- of both bubbles. Neither president had as much influence over the good or bad times as many would believe. Greenspan was not perfect at reading the tea leaves but he was about as good as we can expect. All in all, he deserves a high grade.

I've always been fiscally conservative so I've never had a adjustable mortgage. However, I have had a lot of friends benefit from ARMS. I was really jealous when LIBOR was 1% and a friend was paying 2.6% several years ago. He refinanced out at a good time. I like having the options even if I later got a 15-year fixed term mortgage 3 years ago.

I have a niece who applied for a loan at one of the "W" banks two or more years ago. She and her partner had a combined income of about $90,000. They wanted to buy a home in the Northwest. They qualifed for a loan of some insane amount, well over $500K. She bought a small house for $150K instead. The loan officer was pushing a ARM; my niece got a fixed rate. My niece called my brother since he is an expert in real estate finance. Even without his consultation she has enough sense not to get a jumbo loan with a teaser despite the loan officer sales job.

We had a combination of some greedy folks, some naive folks, and some unscrupulous loan officers. Of course, several other factors as well. We certainly should have had more required disclosure for some of these products. Bush has made a boat load of mistakes, but I don't see how he or Greenspan could have done much else.

I need to review Bush's latest proposal before I can comment on it. My instincts is it won't do much good, possibly some harm.

[Andrew]

I actually bought a condo in San Diego using 100% financing and an adjustable rate mortgage. When it reset after 2 years the value was still okay, but our mortgage did go a bit higher (but not to the point where we couldn't afford a payment). It's been difficult to go through this but I do not believe that there should be any help from the government to bail people out if they are foreclosing. If you were under the impression that making $50K a year is enough to buy a $600K house, then I'm sorry, even government assistance is only going to help so long.

I made my mistake and am living with it. I've tightened my budget and will do what I can to make it work. I'm definitely the wiser because of it and know I'll be okay in the long term. But the mistake was mine and I'm not looking for a handout.

[Randy Adams]

Sheila, I love your post. Sadly I think it will ultimately prove entirely true. But, to be fair and level the playing field somewhat I will bring up the same issue I brought up in my first post on this blog a couple months ago. One of the big engines driving this bubble was the change to the capital gains tax law which was put in place during Bill Clinton's years. Yes, it was the Republican Congress that enacted it, but let's be fair--Clinton signed it. This change actually rewarded people for flipping houses every two years. How else could an average Joe earn $250K (or a married couple $500K) over two years tax-free? Tax policy is a major influence on people's behavior and this extreme tax shelter that served no legitimate interest spawned the whole home remodeling & flipping industry. It's this one tax law that gave us a whole generation of older houses tarted up with their IKEA kitchens and Home Depot bathrooms and their incredible new mortgages. People literally stopped working at conventional jobs and made tax-free livings moving from one "fixer" house to the next at 2 or 3 year intervals, driving up the average prices and undermining neighborhood stability.

Then the artificially low interest rates came into play for just the reasons already identified here and the whacky loan products appeared like toadstools overnight.

So, along with everything else that needs attention, tax law desperately needs to be amended to stop this distortion of the residential real estate market.

[John K]

What we have here is the baby alligator brought home because it was so cute; now, that alligator ain't so baby nor so cute. And, it is no longer possible to quietly flush it away. Under the cover of darkness, its time to leave it in someone else's back yard pool
Posted by: difference between a wife and a girlfriend: 55 lbs.

Now, that is some good stuff. Yep, we need to figure out what to do with the gator. Maybe the gator will be gnawing on the appendages of the folks who brought it home even though they knew it had big teeth. The teeth might have been hidden initially but they were always there. Unless you were really unsophisticated you should have known all gators have teeth and that they are capable of shredding and tearing.

[Surfer]

I can't afford to buy my own house because I only make 60,000/yr. But I can't think of anything I'd rather have my tax money spent on then giving it to someone else who can't afford a house either. I guess that's just the kind of nice guy I am.

[BetterVillage]

As recently as two or three months ago I still had wholesale mortgage reps and other "mortgage professionals" trying to extol the benefits of variable rate pay option (neg am), or interest only loans with a straight face. Look at history, they say... homes are still appreciating, and if borrowers with fixed rates had done variable or neg am, they could have saved 10's of thousands of dollars. This was well after the truth was dawning on everyone. They became so addicted to the drug of large commissions that they actually convinced themselves (I think they really believed this) that arms and neg ams were good.

I started in the industry years ago at a company that was pushing a single product - a first lien equity line of credit (one big heloc on their home), which was tied to prime rate. They had limited success, usually selling it to people by convincing them they were doing something sophisticated. I was amazed I lasted six months with them.... I was the only one there out of dozens of originators who was doing 30 year fixed rate loans. This produced much lower profit for myself and the company, but since I did good volume, no harm no foul. (got plenty of flak from folks that called expecting to pay 1% with no closing costs, pull cash out, and then do this again in 3 or 4 months).

The people that are calling us lately are usually just trying to feel out the market, or are desperate to be put in an even worse loan to stave off foreclosure. We have pushed a fair number of loans through lately only to have the lenders either cancel the loans, redo their guidelines, or just go out of business before we can get loan docs out to the borrowers. We're getting very good at staying on top of dependable lenders on an almost hourly basis. Some deals are still fairly solid... but they tend to be the ones with 20% or more equity, plenty of reserves, documentable income, platinum credit, low debt ratio. If you know people like this, call us!

[J.W]

I just read that Ameriquest Mortgage out of Orange closed it's doors. The owner of the company is Roland Arnall and I remember he bought a house in Aspen a couple of years ago for $46 million. I googled him and found this:

"On the same day that the White House announced that President Bush is nominating California billionaire Roland E. Arnall to be ambassador to the Netherlands, the company he controls said it would set aside $325 million for a possible settlement of allegations of predatory lending tactics.?"

I find all this very interested.

[Kathryn]

The problem aren't ARMS, it's who the ARMS were marketed to. Adjustable rate morgages are not for those struggling to pay their bills, with bad credit, and little financial stability. Greenspan was right, ARMS are a great way for people to save money, people who can afford their loans and take a bit of risk in their financial dealings. The government needs to make sure the law keeps lenders from making these idiotic loans ever again. They won't, but they should.

This mess was all caused by the fact the economy is being fueled by nothing but debt. Americans keep getting farther and farther behind. Spending is going up far faster than salaries, no one saves, everything is just borrow, borrow, borrow, most live well above their means. No wonder the Feds keep saying everything is fine, consumer spending is two thirds of the GNP. They don't want people to start saving or thinking rationally about their spending. They want more people to buy more homes they can't afford and if people get loans they can't manage, then the government will help them out so the big debt machine that is the US economy keeps going on.

[Sam]

If ARMs are managed right they are a much more cost effective method of financing a home over a fixed rate. To benefit you pay down the prinicpal every month and when the ARM resets every year it will most likely go down. A fixed rate you are stuck with the same rate for ever and a huge cost for any modfication. The issue is most morons do not have a clue on how an ARM works and like your typical American homeowner live from pay check to pay check and never pay down the prinicpal.

[Ann]

I have used ARMs for the last twenty years and think they are great. I would hate to see them disappear because people are too lazy to learn how they work and determine whether they meet their financial needs. I particularly like the neg am loans with payment options and payment change caps. The neg am feature allows me the option to temporarily add interest to the principal balance rather than pay a higher payment when rates rise. When rates fall, the principal is paid down faster. People generally lose their homes because they can't afford the payments, the neg am feature reduces this risk.

[difference between a wife and a girlfriend? 55 lbs.]

Shelia, as we down under say: "you're a shelia."