Wednesday, May 10, 2006

Twisting your ARM or breaking it?

No need to panic, we'll be fine... As long as jobs don't decline, or home prices don't decline, or rates don't increase..

From ABC News:

Home Foreclosures Up as Mortgage Rates Climb

"As interest rates increased steadily over the past year and the explosive growth in housing prices declined, many Americans fell behind in their mortgage payments. Now some have defaulted on home loans and could lose their homes due to foreclosures."

"When home prices soared at double-digit rates during the recent red-hot housing market, many Americans stretched themselves financially to purchase a home. The use of lower-interest adjustable-rate mortgages, or ARMs, interest-only mortgages or option-ARMs that allowed home buyers to choose how to pay each month soared during the same period."

"According to the Mortgage Bankers Association of America, ARMs now represent 25 percent of the more than $8.5 trillion in outstanding loans."

"Economists with Moody's forecast that the interest rates on $2 trillion of those mortgage loans could be reset in 2006 and 2007."

"And that could become a problem if interest rates continue moving higher."

"Homeowners who negotiated ARMs in 2004 and 2005 could face interest rate increases that boost monthly payments by as much as 50 percent. One in eight of these people is expected to default on their loans — as many as 1 million, according to First American Real Estate Solutions, which compiles national real estate data."

From Reuters:

Fannie CEO frets about adjustable mortgages

"Fannie Mae's chief executive said on Wednesday the U.S. housing market will face significant resetting of adjustable rate mortgages over the next two years and he worries about this sparking foreclosures in some locations."

"Daniel Mudd, president and chief executive officer of the government-sponsored mortgage giant, told Reuters in an interview that Fannie Mae models suggest a couple of reset "spike periods" in the next two years, based on past originations of mortgages with adjustable rates and other features such as low initial "teaser rate" periods."

"It is still unclear what will happen to the housing market when these mortgages reset at higher rates, especially given some of the weakening in certain housing markets, such as vacation areas with a lot of investment buyers."

""If jobs are pretty stable, if home prices have come up underneath the mortgages to support them and if there's not any incidence of appraisal fraud, it could be just fine," Mudd said. "If in certain geographies, some of those factors are different -- there's some appraisal fraud, or there's an economic downturn or home prices have declined -- it could be a very different scenario."


Blogger Metroplexual said...

Just to set the record straight Fannie and Freddy are GSEs. Which are Government Sponsored Enterprises. They are private companies with an edge. They sell stock on the exchange like all good banks do. However, there is an implied backing of the Feds if all should go south. Also, they do not pay property tax in DC up on Wisconsin and they get a fed discount on their money

5/10/2006 07:17:00 PM  
Blogger chicagofinance said...

What a mouthful of crap!

"If jobs are pretty stable, if home prices have come up underneath the mortgages to support them and if there's not any incidence of appraisal fraud, it could be just fine," Mudd said. "If in certain geographies, some of those factors are different -- there's some appraisal fraud, or there's an economic downturn or home prices have declined -- it could be a very different scenario."

OH REALLY? Well thanks for that info.

5/10/2006 09:31:00 PM  
Anonymous Anonymous said...

So whats going to be the next money maker? Prior to this real estate boom it was the tech bubble, after that burst money went to real estate, now that this is going to burst what will be the next opportunity to exploit and bring to a bubble?

Will money head back into the markets? The Dow is headed for an all time high for closing soon.

I'd look to the short side of real estate but the builders have already been wacked. Do you look towards alternative fuels and buy stock there? Not sure where to put money to work, although treasury bills are returning 4.5-5%

5/11/2006 04:43:00 AM  
Blogger grim said...


I'd suggest you widen your scope and think global.


5/11/2006 05:10:00 AM  
Blogger pesche22 said...

buy gold , silver, copper

5/11/2006 05:16:00 AM  
Anonymous iLoveData&Graphs said...

gold, silver and copper are too late... they are already peaked... getting into those are like buying a home at the peak in 2004... yeah it might go up little, but you are looking for a hard fall...

I agree with grim... look at international... take a look at any Latin America mutual funds... they are on Fire... and no one is even talking about them... I sold my Gold that I bought in 2002 (FSAGX) and bought Latin Mutual FUnd (FLATX)... so far 12.9% gain within last 3 weeks... SICK!

5/11/2006 05:26:00 AM  
Blogger pesche22 said...

buy brazil, china austria india
if you like international.

buy the way gold will be
at 800 soon its still early

5/11/2006 05:29:00 AM  
Blogger pesche22 said...

the etfs are the easy way

gld ewo ewz eww
ifn for india

also with the falling dollar
try the bzn for brazil

ch for chile

5/11/2006 05:33:00 AM  
Blogger pesche22 said...

and if you want to make a buck
today try the fxi
it will rally on the no balls
of the us gov. verus the yuan

5/11/2006 05:41:00 AM  
Blogger minutesfromNYC said...

"ARMs are great! Thanks to the low monthly payments, I can afford to live in a 600k center hall colonial in prestigious Bergen County...just MINUTES from NYC!"

I also think with all these ARMS about to default soon, maybe being in the automotive repossession business will be lucrative as well. We all know that people who like to over-extend themselves have a self esteem issue, and want to prove something to society when they are in their McMansion (you know, the ones where you can see their "Home Depot" Chandelier from the street) and they love to lease "pretend wealth" vehicles like the Escalade, BMW 3 Series and the Mercedes C Class - -All coming to a repo lot near you!

5/11/2006 07:12:00 AM  
Anonymous Anonymous said...

International is a good thought for investing but alas I fear Latin America, China, and India have ties to the US economy in that they depend on our consumer purchases. What happens in a tide of rising intrest rates when peoples mortgage and rent bills go up? Consumer spending will fall off thus causing pain, especially to China. Not as much in Latin America or India but given the economic ties and the current economic instability in the US I'd invest selectively in foreign industries not dependent on the US. As for gold, oil, commodities well they will go back down as the fed tightens interest rates and the dollar shores up its value, now if we could only pay off some of the national debt.

5/11/2006 09:18:00 AM  
Anonymous Anonymous said...

Stay away from BRIC!


5/11/2006 10:24:00 AM  
Blogger grim said...

The views expressed by the blog author or any of it's participants should, in no way, be interpreted as investment advice.

5/11/2006 11:01:00 AM  
Blogger lindsey said...

Thanks for the comment as a lead in, and for the wise reminder about investment advice.

That mantra "as long as the rest of the economy holds out," has become affixed to every prediction that things are going to be fine. From Lereah on down it's what they will point to when there is a broad collapse, and of course it's garbage.

As far as investments go, my mattress is starting to look pretty good...

5/11/2006 12:45:00 PM  
Anonymous Anonymous said...

Well the mattress is questionable, with inflation what it is. I put my money in CDs or t-bills. I would also think that large cap stocks are a good bet right now, relatively low prices can survive economic downturn, lower risk, diversified businesses. I would limit my risk exposure until the rate hikes are finished and we start to pay off the deficit, I'm too squeemish in an unstable econ. Real estate in stable markets that lacked growth seem to be a decent bet.

By the way none of this constitutes financial advice.

5/11/2006 12:55:00 PM  
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5/18/2006 04:23:00 PM  

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