Reconciling assholes for nearly a decade.

I'm not gloating

"The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

There was plenty more going on behind the scenes they didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing.""



http://www.businessweek.com/magazine/content/06_37/b4000001.htm?chan=top+news_top+news+index_top+story
Permalink Send private email sharkfish 
September 3rd, 2006 8:43pm
I am. I want to go egg the house of every fucking broker that told me "take out an ARM; interest rates won't go up that much"

I'm glad I didn't listen; feel bad for the folks that did.
Permalink Send private email Philo 
September 3rd, 2006 8:45pm
We nearly ended up with an ARM.  Our broker was a crooked motherfucker. The only reason we didn't was that he couldn't get a bank to qualify us.  Our FHA loan is fixed at 6.5.
Permalink Send private email muppet 
September 3rd, 2006 8:46pm
Would now be a good time to get an ARM with rates at a high?
Permalink r 
September 3rd, 2006 8:50pm
Everybody keeps saying the bubble is collapsing but we have like, 5 expensive developments going up within 15 miles of our house.
Permalink Send private email muppet 
September 3rd, 2006 8:53pm
There's a lot of development near me too. But these things take a whlie to come to fruition, so I'm not sure it's that good an indicator.

And they probably didn't get ARM loans.
Permalink [x] 
September 3rd, 2006 8:55pm
Watch for those to be scaled back where possible and sold cheap.  Pop!  Let us know.
Permalink  
September 3rd, 2006 8:55pm
Holy smoke. Tobacco ethics in the finance world. Who'd have thought that could happen :-) From the OP:

"Analyst Frederick Cannon of Keefe Bruyette & Woods says most banks don't apologize for their option ARM businesses. "Almost without exception everyone says [the option ARM] is a great loan, it's plenty regulated, and don't bug us," he says. In an April letter to regulators, Cindy Manzettie, chief credit officer for Fifth Third Bank in Cincinnati, said it's not the "lender's responsibility to help the consumer determine the appropriate payment option each month.... Paternalistic regulations that underestimate the intelligence of the American public do not work.""

Thank you. I'm now in possession of a lovely new weaselword "negative amortisation"  to beat up the business biddy at the bank with.

For Crissake read the fricking contract. Do the sums. Run financial advisers out of town stuck to a rail with hot tar but above all else teach these finance fundamentals at school.
Permalink trollop 
September 3rd, 2006 9:16pm
Yeah, so all you finance experts, if rates are going down from here, is an ARM a good buy *now*?
Permalink r 
September 3rd, 2006 9:31pm
It's not a matter of choosing the payment, it's a matter of selecting an ARM in the first place.

My statement makes all the numbers very clear, if somewhat surprising. For example the minimum monthly payment is only 66% of the interest only payment, and only 57% of the 30 year payment. If I only made the minimum payment my debt would increase rapidly.

The monthly statement also shows the amount of principal paid last month and for the year to date, and the current principal remaining. It leaves no doubt how much is owed.

However, the rate at which the interest rate is going up is alarming. If I were stretching to make payments I would be switching to a fixed rate pronto.
Permalink Send private email bon vivant 
September 3rd, 2006 9:33pm
What makes you think interest rates are going down from here?
Permalink Send private email Philo 
September 3rd, 2006 9:35pm
"If I were stretching to make payments I would be switching to a fixed rate pronto."

And paying 10,000 in pre-payment penalty (see the sob story in the article.)
Permalink  
September 3rd, 2006 9:35pm
I don't have a prepayment penalty. I made sure of that when I picked the loan.
Permalink Send private email bon vivant 
September 3rd, 2006 9:37pm
Just a guess of course...

Inflation is going to ease. Weak hiring in august, poor wage growth, and the drop in consumer confidence gives me the feeling that the labor tightness is easing. Year on year comparisions will be better for oil.  Price is below $70 now regardless.

The fed didn't raise rates at the last meeting.

Housing bubble unwinding will mean less consumers spending home equity either through actual loans or simple wealth effect.  This will slow the economy.

Slowing economy, no inflation, time to cut rates.

Next week's Beige Book should be very interesting.
Permalink r 
September 3rd, 2006 9:44pm
This could have been over the top, but we crunched all offers at 3, 5, 7, 11 and 17% base rates for 5,10,15 and 20-year mortgages taking into account all upfront fees (incl legal), penalty fees, exit fees, monthly fees(!) and finally the minimum repayments and found the ones offering a cheap initial rate wound up just as expensive as the more flexible, more expensive ones with a couple of rotten deals showing themselves up for what they were. 

Reason is the wholesale cost of money doesn't vary much to the lenders. Marketing costs vary, as does the presence of commission agents such as "financial advisers" and then you have to make a profit ...

My point is that Excel has some excellent analysis tools once you have ALL the costs in black and white.
Permalink trollop 
September 3rd, 2006 9:55pm
> My point is that Excel has some excellent analysis tools once you have ALL the costs in black and white.

Yup. I once drew up a 360 row sheet (30-year mortgage, yo!) with all the fixings. It's fun.

I'm surprised people have computers and mortgages and don't have an Excel worksheet with their expected/actual payments figured out in advance.
Permalink just me 
September 3rd, 2006 10:19pm
>> I'm surprised people have computers and mortgages and don't have an Excel worksheet with their expected/actual payments figured out in advance. <<

These are the folks who got ARMs instead of a fixed-rate loan.

Honestly, when mortgage rates were at 6.25% (or lower, I forget), who could in all seriousness, think that they were going to stay that low, or go lower?  Of *course* the rates were going up sometime in the next 15-30 years.

I'm having a tough time feeling sorry for the people who got these loans and then didn't remember to refinance later.  The problem is that their lack of foresight is going to cause problems for the rest of us.


I want to see a new section added to the SAT for Financial Knowledge.  The kids would have to balance a checkbook, pick out the terms in a credit offer, and decide which loan is more to their advantage.
Permalink xampl 
September 3rd, 2006 10:29pm
> I want to see a new section added to the SAT for
> Financial Knowledge.

If it's basically financial terrorism then why was it legal? Financial knowledge won't change a thing. My grandpa would say you should flunk because you should save and never take out credit.
Permalink son of parnas 
September 3rd, 2006 10:59pm
Actually, you're right. I'm not organized enough to keep track of my payments every month, though I could plan it out once.

I remeber a few weeks ago at a bookstore a couple of middle aged folks were trying to teach their teenage kid about interest. They said stuff like 'If you borrow a dollar from someone, they will ask you for 5% of the dollar. How much is 5% of a dollar? How much? A nickel, right?' While the kid just sat their dumbly.

Then I realized the kid was like 20 and they were trying to get the kid to actually buy a house any day. Um, I think one should have a little more financial experience before purchasing the largest asset they will ever buy.
Permalink just me 
September 3rd, 2006 10:59pm
> I think one should have a little more financial
> experience before purchasing the largest asset they
> will ever buy.

You can get preggers at any time without any experience.
Permalink son of parnas 
September 3rd, 2006 11:04pm
Yup. If I see the same couple talking to their 9-year old about how to get single mother welfare checks, I'll know the real estate boom is long gone and the baby boom itself is past its due date.
Permalink Send private email just me 
September 3rd, 2006 11:11pm
Heh. There are legal limits on how young, if not dumb and innocent you can be before the fucker faces court. Just as in finance:

http://en.wikipedia.org/wiki/Usury

especially:

http://en.wikipedia.org/wiki/Predatory_lending
Permalink trollop 
September 3rd, 2006 11:11pm
"Honestly, when mortgage rates were at 6.25% (or lower, I forget), who could in all seriousness, think that they were going to stay that low, or go lower?  Of *course* the rates were going up sometime in the next 15-30 years."

Well, sure, rates might go up sometime in the next 30 years, but that doesn't mean the *average* rate over the that time period is going to be higher than 6.25%
Permalink  
September 3rd, 2006 11:35pm
You americans have fucked-up mortgages...

We have variable-rate mortgages, but they're just based on the government prime rate (roughly equiv to the Fed Reserve Rate), no room for lenders to hose you like that.
Permalink Send private email Ward 
September 3rd, 2006 11:51pm
Having seen rates go beyond 17% I suggest doing sums based on a range of scenarios including the worst you can contemplate because that's the one that tips you out in the street.

Asset erosion is another killer - what happens if values go down and you enter the despondent valley of "negative equity"?

We're in for a bumpy ride here in Oz as the Govt has just made superannuation savings rather more attractive to those who had been investing in property - so demand is down as are houseprices here and there. If you'd bought at the peak ...
Permalink trollop 
September 3rd, 2006 11:57pm
of course, ours is based, roughly modulo fraud and deceptive lending practices, on the fed rate as well.  the fact is that rate has gone up 17 times since 2001.  It was like 6.5% in 2000. Bubble burst. Cut cut cut. Sept 11. Cut. Cut. Bottomed out in 04 at around 1%, has been going up since. About 5.25% now.
Permalink  
September 4th, 2006 12:00am

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