New Haven Independent

Posted by: eastshoreguy | April 8, 2008 9:48 AM

Nice spin on A.R.M.'s Andy.

Everybody wants a piece of the American dream, especially if the family you came from didn't own their own home. So when you have a good job, steady income and someone - like a sub-prime mortgage broker waives easy financing in your face - a lot of folks jump at the chance.

So who is at fault? The first time homeowner or the broker that misrepresented or didn't sare all the facts?

Tough talk and cleaver spin from a man that makes money on sub-prime loans himself.

">http://www.andyrossgroup.com/products/tabid/2674/Default.aspx>

Posted by: robn | April 8, 2008 7:15 PM

Not so fast Mr. Ross,

Although you're technically correct that a majority of ARMs will reset in the next few years, according to Credit Suisee over half of the subprime arms have already reset and a lot of people are in trouble.

http://www.bubbleinfo.com/statistics-2007/2007/3/15/arm-reset-schedule.html

ARMs a re a crappy, predatorial product in a severely underregulated industry. Bring back Glass-Steagall and stick it to predatorial lenders! They have the MBA's...their customers don't.

Posted by: Ned | April 9, 2008 8:04 AM

What part of "adjustable" don't people understand? "There's a sucker born every minute and two to take 'em..."

Posted by: eastshoreguy | April 9, 2008 8:34 AM

let us review a previous andy ross post from the 7th of december - this is an all time classic.

"I see people not taking responsibility for their actions, I can't help but wonder. I am referring specifically to the current so-called subprime mortgage crisis. Mortgage loans are an integral part of our society. They allow people to buy homes and by doing so they allow people to build equity to use for education, for retirement, or for future generations. Mortgage loans make the pride of ownership possible for many levels of our population. When the price of homes became increasingly expensive, banks and other lenders devised programs to serve a broader spectrum of buyers, buyers who might otherwise have been closed out of their piece of the American dream."

"Let's not sit here blaming the media for hyping the situation. Let's not blame attorneys who made money on fees and title insurance for each borrower. Let's not blame Wall Street, which made all this money available to the banks, who then made it available to the brokers . . ."

I love the "so-called sub-prime crisis" line.

Posted by: Super Dupe | April 9, 2008 10:58 AM

When my wife and I bought our starter house in 1993 we scraped together a down payment and signed up for a three year ARM. We wanted to access a lower rate intially to get into the house because otherwise we would not have been able to afford a higher fixed rate at that time. We knew that the rate would re-set probably at much higher rate in three years, but we were willing to accept that because we were confident that we would be making more income and that things would be better for us financially. Sure enough after three years in 1996, the rate did rise - as did our monthly payment. But we had also had received raises at work and in the meantime had paid down other debt so even though the rates raised, our cash flow worked and we were not squeezed.

And on top of that, throughout the entire decade of the nineties, the short term variable rates stayed well below the fixed rates. So even after the inital rate hike, we actually saw our rates go down twice. In the end, we were far better off financially because we had obtained a variable rate and had not signed up for a fixed rate.

We weren't just lucky though. We had thought through the worst case scenario and we accepted the potential risk that the rate would go up.

To me this doesn't seem to be such a hard concept to get across to most people. There are tons of people who somehow successfully navigated the complexities of purchasing a house, getting a job, buying insurance, signing up for credit cards, purchasing appliances, cars, entered into all sorts of complex transactions and suddenly when their rates went up they became - unwitting dupes!

In my book, predatory lenders are clearly attempting to deceive. They hide information which is legally required to be disclosed to all borrowers. They hide the fact that rates can go up. They hide the fact that there are fees for this and fees for that. These practices are and should be illegal.

But I'd like to know at what point do buyers themselves have a responsibility to watch out for themselves?

My question to the posters who call all ARMS predatory - should I have not been able to have a variable rate option? Are you saying that I should have been restricted from buying this product?

And one more provocative thought, what would you say to the "unwitting dupe" who signed up for a fixed rate at the beginning of the nineties only to watch that variable rates keep going down and down? He would have spent THOUSANDS of dollars more on interest because he took a roll of the dice and got stuck in a high interest fixed loan. The only way he could get out was to pre-pay his fixed rate loan and then pay lots of upfront fees to get into another mortgage! Doesn't rate risk go both ways?

Posted by: write&wrong | April 9, 2008 1:39 PM

Andy, Good piece. This is obviously a very complex problem. Thank you for sharing your valuable insights and thoughts.

Super Dupe, thanks for your contribution.

Posted by: Your Tax Dollars at Work | April 9, 2008 3:48 PM

Everybody feels sorry for borrowers who take low initial rates ARMS allowing themselves to be seduced by what seem to be grand opportunities on the supposition they'll be able to "afford" because home prices and incomes are forever going up and interest rates will go down. But really, they did it to themselves.

They got super-adequate disclosures. They just didn't read the documents. OR they didn't believe they would be caught in the rising-interest, rising local taxes, rising utilities prices, and LOWER INCOMES economic vice.

Nice article Andy!

Posted by: robn | April 9, 2008 6:06 PM

Talking a first time buyer into an ARM during the lowest sustained interest rate period in history is predatory. As we're seeing now, ARMs are inherantly volitile and dangerous to the market and to vulnerable cities. They should be banned or regulated in some manner to prevent whats happening now.

Posted by: Super Dupe | April 10, 2008 8:16 AM

ROBN

ARMS should be banned? All I can tell you is that if an ARM wasn't available to me, I wouldn't have been able to afford my first house for years afterward! And consequently I never would have built the equity in my home which is now partly paying for my kids to go to college.

I hope that the government never decides to stop people from entering into contracts under terms with which they agree. That would seem to me to be pretty authoritarian.

There are some unscrupulous lenders out there but I guess I would rather run the risk of getting ripped off by a bad guy than being banned from a product that worked wonders for me. (Also, I'm pretty careful when I'm shopping for really big things.)

Smart regulation or better law enforcement might work, but a simple ban on ARMS doesn't seem like a well thought out policy.

Posted by: THREEFIFTHS | April 10, 2008 8:37 AM

Look out I hear that pay day loans are comming,Which are just as bad as the amr.

Posted by: Your Tax Dollars at Work | April 10, 2008 9:11 AM

ROBN: Nobody's ARM was twisted! Fed regs require full disclosure. Greedy borrowers just ignored the warnings inherent in the disclosures. They knew they were getting "teaser" rates good for a defined period of time. Some folks just figured home prices would continue to escalate and they could bail out by selling their homes at higher prices down the line. Sorry, rising real estate prices are not guaranteed!

And by the way, the "lowest sustained rate period in history" is not over. The Fed is back to a lower rates policy to save the economy.

Posted by: robn | April 10, 2008 9:42 AM

YTDAW,

...the fed is lowering rates why??? because a policy of lax industry oversight has failed...

Posted by: Your Tax Dollars at Work | April 10, 2008 11:06 AM

Fed's actually been doing it's job very well -- stepping up to the plate when needed, lowering rates to do whatever possible to save "investors'" (including homebuyers)asses because those folks borrowed too much assuming their fixed asset values would rise forever.

For lots of reasons (including escalating prices of commodoties like oil) the world (all of which is not within the Fed's purview of regulation) is now experienng classic de-leveraging (paying off debt because fixed asset prices are coming down) and this usually hurts folks who borrowed more than they should have whilst gambling on higher prices of their fixed assets (for instance: homes)

Posted by: Jim Mac | April 10, 2008 11:21 AM

Ross bloviates that: "If you have chosen to finance your home with a hybrid mortgage that doesn't fit your situation, you have chosen to use your family home as a short-term investment. You have entered the high-risk game of speculation."

If that's the case, then the investment bankers, Wall Street investors, direct lenders et al are guilty of throwing money at problem gamblers in the hopes that they'll go on at endless winning streak.

The institutions that Ross mentions have armies of people who are supposed experts at assessing risk. No one forced them to lend the money.

It doesn't take a mathematical genius to determine that giving people mortgages that initially consume, say, 40% of their income at the top of the market is going to result in a bloodbath when values drop and rates adjust upward. And such adverse conditions are ALWAYS, eventually, going to occur in any market.

If an engineer designed a bridge with such an absurd, cavalier dismissal of risk, the results of his failings would be manifest within a few years.

Banks, real estate professionals, investment houses, etc. all need to step up and accept responsibility for their stupid, absurd, overtly negligent actions, instead of constantly trying to shift the blame.

Posted by: robn | April 10, 2008 11:23 AM

YTDAW

Aid to homeowners is a red herring and peanuts compared to the massive assistance being given to large corporations. The real crime is that the Fed has overstepped its authority and done a huge back door bailout of companies that are supposedly "too big to fail" (JP Morgan / Bear Sterns deal for instance.) All of a sudden free market champions are asking for goverment intervention to save their own skins. Its really just musical chairs until somone is left with the bad debt. That will be the taxpayers, not the supposedly brave investors in the free market.

Ben Bernanke accurately described the current situation as one where you have ten bottles of water and one is poisen, therefore, everyobody's afraid to take a drink. This is a product of allowing the market to pollute its own product and they, not taxpayers, should be forced to drink it.

Posted by: Your Tax Dollars at Work | April 10, 2008 12:03 PM

SURE, SURE! IT'S THE CAPITALISTS AGAIN! AND YOU, MY FRIENDS, HOW DO YOU MAKE YOUR LIVINGS?

Posted by: robn | April 10, 2008 12:47 PM

YTDAW,

We don't live in a capitalist economy; its a mixed economy with market forces tempered by regulation intended to level the playing field and keep economies stable. The 1999 dismemberment of Glass Steagall allowed the liquidity crisis shennanigans to happen (top down). The firewall between investment banks and commerical banks should be reinistated.

Posted by: Jim Mac | April 10, 2008 12:51 PM

That's the thing, Tax Dollars, they're not real capitalists. If they were, they'd take their beatings and eat their losses, instead of crawling to the Government for a bailout. The same Government that they constantly whine about.

There was a great recent article by Andy Xie in the Financial Times about this very topic.

A few excerpts that stuck with me:

"The global credit bubble is bursting. This bubble is primarily leverage financing for owning risky assets. The people who were responsible for what happened played with other people's money, marketed arcane financial products with false promises of fat profits, but stuffed their own pockets with big bonuses. Neither these masters of the universe nor their greedy but naive investors deserve to be bailed out. They deserve what is coming to them."

"Markets have been taking more risk than they should because they believe that central banks will come to their aid during times of crisis, like now. The penchant of Alan Greenspan, former U.S. Federal Reserve chairman, to flood the market with liquidity during financial instability is the genesis of this 'central bank put.' As long as this expectation remains, financial bubbles will occur again and again. Now is the time to act. Let the crooks go bankrupt. Central banks should bury the Greenspan 'put' for good."

Posted by: Ned | April 11, 2008 2:15 PM

Here's an interesting solution