Sub-Prime Pipe Bomb

From the Daily Reckoning, by Bill Bonner:

A Farewell to ARMs

In the dream world of the early 21st century, there has never been a better business than the credit business. The credit merchants borrow at institutional rates lower than at any time in their lives and re-lend to a public with an insatiable thirst for debt. The borrowers don’t seem to care about paying back; it’s enough that they can make payments. And the lenders don’t seem to care about not getting paid back; it’s enough that they can pass off more debt, first to the decent credit risks and then to the sub-prime borrowers, until they are doing little more than selling gaudy Cadillacs in the ghetto, with no money down. And there is scarcely a gaudier piece of junk than an adjustable-rate mortgage. In the right hands, ARMs are legitimate bets on the direction of interest rates. But in the wrong ones - and who in America’s suburban ghettos understands yield curves? - they are homemade car bombs…liable to blow up in the wrong place at the wrong time.

And who would want such dangerous ARMs except the fools most likely to blow themselves up? That they are adjustable is their selling point. But like the rest of the fancy merchandise on the market - the I.O., or interest only mortgage, Neg Am, or negative amortization, and even the 50-year mortgage - ARMs are in fact diabolical devices intended to speed marginal buyers on the glittering road to hell. ARMs give the weakest buyer the luxury of pretending to buy what he really can’t afford. He pays a low rate while cash flow is tight and hallucinates that rates will be even lower when he goes to refinance. Any wonder that now, finding themselves both ARMed and endangered, the poor consumers drag into credit counseling, long of face and short of finance? But at least they’re not alone.