Saturday, July 29, 2006

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.


Blogger rymingrealtor said...

This comment has been removed by a blog administrator.

7/29/2006 09:34:00 AM  
Blogger rymingrealtor said...

and who in America’s suburban ghettos understands yield curves?

I think that quote could have easily said
Who understands yeild curves

Why assume it is only certain people, economics is misunderstood by the masses.
One of the masses...........


7/29/2006 09:38:00 AM  
Blogger chicagofinance said...

Economics is not misunderstood, people just get fed misinformation by those who want to make money on the misinformation.

7/29/2006 10:21:00 AM  
Anonymous Anonymous said...

ARMs are also appealing when so many folks seem compelled to climb up the property ladder every few years, when you must change jobs or take transfers to get ahead or stay employed, and when the average length of home ownership is something like six years. No doubt some folks go for an ARM because it is all they can afford and they hope for the best. But in many cases an ARM (especially a 5 or 7 year ARM) makes agreat deal of sense.

7/29/2006 11:16:00 AM  
Blogger Mr. Oliver said...

Chi, I have to disagree with you. A (scary) large number of people have no idea of the basic concepts of economics.

My basis for this is the number of smart, intelligent people I've watched put themselves into precarious financial sitations over the past few years to get a home.

Primarily from you and the rest of the denizens of this board, I've come to appreciate what an ARM can do for someone, in the right hands.

However, everyone that I know that has used one has used it to get into a home that they could not otherwise afford. Of course these are the same people that told me I'm crazy for not doing it myself because, as you and I know, "real estate never goes down," and
"NY/NJ is different."

7/29/2006 03:45:00 PM  
Anonymous Anonymous said...

Shy town,

I have to agree with Oliver.
People don't know shit from shinola.

The govt, the fed, and multinationals screw joe six pack everyday while they just smile, go deeper in debt, buy China made goods, and only care about Oprah, sports, and who Katie Couric is blowing to get a new job at CBS these days.


7/29/2006 04:54:00 PM  
Anonymous Anonymous said...

"Learning is fun!" (per site below)

Hmm. Don't know how much fun, but here are some sites for you, KL

7/29/2006 08:26:00 PM  
Anonymous Anonymous said...

I heard from a banker friend that many 20 somethings are buying larger houses with Option ARMs.

7/30/2006 08:49:00 AM  

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