"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

I may be stating the obvious, but has it occurred to others
that banks offering ARMs calculated the cost of massive
foreclosure and found it far less than projected income? The
banks can count as benefits (1) non-defaulting mortgage
payers either paying higher interest rates, refinancing (and
so generating nice fees for the banks), or selling (and so
generating more fees for the banks), etc.; and (2)
defaulting mortgage payers leaving the banks a home that,
even auctioned well below market value, pays the banks
(and/or their ilk) a nice sum.

Granted: This has thrown the various creative instruments
for financing home loans into a tizzy, with quite an
aftershock on investors in these instruments. Plus people
thrown out of their homes are people who are going to tend
to be less than productive at their jobs, which can affect
the whole economy, relying overwhelmingly as it does on blue
collar labor. Plus, after being put through the mill for
home costs, with what will they pay for health insurance? No
health insurance means less health, which means even less
domestic productivity.

So banks (and their ilk) arguably are profiting mightily
(with some exceptions) and per plan. The rich get richer;
the poor (and overwhelmingly poorly educated as well) get
poorer. Desperation results; crime rises. The ensuing
economic and sociologic meltdown ultimately produces more
regulation of those who hoard money.

These are my thoughts after reading about home auctions in
the NY Times as well as ones happening soon where I live
(out West). These auctions are going to make some people a
pretty penny.

May I offer one more point, additional, not to the contrary?

ARMs don't go back that far historically speaking. They were not around
in the 70's for the run up in rates that finished with an 18% T-Bill (am
I off here?). So, given much of ARM history is in the time period that
has had a fundamental trend that's just now reversing, why is anyone
surprised the data shows this to be the best choice? For most of the
decline in rates, it was.

For an analogy, I offer this.
http://www.moneychimp.com/articles/r...me_horizon.htm
tells me that from 1980 to 1999 the average return is 18.3% with a STD
deviation of 12.6%. Only two negative years, at -4.8% and -3.1%. With
the benefit of hindsight that goes back many decades prior, I know this
snapshot is just that, a (too small) window of time that can result in
wrong conclusions.

Even in the 90's, when I was asked for ARM advice, I produced a
spreadsheet which showed both best case, further drops in rates, and
worst case, rates going up the full adjustment to the maximum rate over
3-5 years. More than ever, I don't claim ARMs are evil per se, but I do
think that one had to be properly qualified which clearly wasn't how
these banks ran their business.
JOE
www.joetaxpayer.com

On Sep 24, 10:36 am, Beliavsky <beliav...[at]aol.com> wrote:
- quote -

An article on page C1 of today's (Oct-24-2007) Wall Street Journal
indicates that people using option ARMs are getting into trouble at
higher tates than those with conventional mortgages. For most people,
who are not as rational as the actors in economists models, option
ARMs are a bad idea.

Countrywide's New Scare
'Option ARM' Delinquencies Bleed
Into Profitable Prime Mortgages
By RUTH SIMON and JAMES R. HAGERTY
'It now appears that many borrowers who moved into option ARMs were
attracted by the low payments and may have been staving off other
financial problems. More than 80% of borrowers who are current on
these loans make only the minimum payment, according to UBS.

Mr. Mozilo told investors in September 2006 that he was "shocked" so
many people were making the minimum payment. He called a sampling of
borrowers to find out why. The "general answer...was that the value of
my home is going up at a faster rate than the negative amortization,"
he said. "I realized I was talking to a group...that had never seen in
their adult life real-estate values go down."

The temptation to use these loans was strong. A borrower with a
$520,000 mortgage at a 30-year fixed rate of 6.05% would pay $3,134
monthly. With an option ARM carrying a 1% introductory rate, the
minimum payment in the first year plummets to $1,673.

But after a specified period, often five years, when borrowers must
start repaying principal and meeting full interest payments, monthly
payments can more than double. If the balance outstanding gets too
high -- the ceiling generally is 110% to 125% of the original amount
borrowed -- borrowers can face sharply higher payments even sooner.
Some borrowers could find themselves in the painful position of owing
more than the value of their home.'

On 2007-09-25, camgere[at]earthlink.net <camgere[at]earthlink.net> wrote:
- quote -

I liked the section where they talked about how good a benefit to the
consumer it was if early prepayment penalties were high, since if the
bank knew it was difficult for the consumer to leave they'd then give
the consumer the best possible benefits.

It reminded me of one of those "studies" that prove communism is the
best economic system.

camgere[at]earthlink.net wrote:

- quote -

The low rate cycle was an accident waiting to happen. Let's ignore
teaser rates, and look at a fully amortizing ARM.
At 1% T-bill, the rate would be close to 4%, $250K mortgage for $1200/mo.
When the T-bill hit 5%, and the rate went to 8%, that payment is near
$1800/mo.

The reference to the 'perfect world' is great. Because in the perfect
world, the borrower here either had a low debt to income, and used the
$600 savings to pay off the car, kill off a credit card, or float their
expenses till the spouse graduated and started work, or went back to
work after maybe staying home with a newborn. In the perfect world, the
$1800 at least appeared on a spreadsheet and was known as the second
year adjusted rate.

You see, 1200 to 1800 is enough of an issue. Add the teaser rate,
dropping the first payments to $600, and negative amortization,
increasing the $1800 to $2000, then double all numbers for a loan of
$500K, and you can see how it goes from reckless/ignorant to insane.

Oh - in the perfect world, every one of these were at 80% LTV or less,
but even then as they adjusted, too many houses coming on the market
still depresses prices. I didn't read the whole story mentioned by the
OP, for 65 pages I need to print first, but the papers starts in the
perfect world, where there seems to be more intelligence regarding the
numbers.
JOE

On Sep 24, 7:36 am, Beliavsky <beliav...[at]aol.com> wrote:
- quote -

Unfortunately this paper will be used by mortgage brokers to talk
buyers into using ARMs.

This paper laughably argues that buyers will pay more than the minimum
when interest rates are low and reduce their luxury purchases to pay
the mortgage when interest rates go up. I believe the reality is that
many buyers simply make the minimum payment always. They feel their
luxury budget is already non-existant.

Random interest rates aren't the situation we find ourselves in
today. We have had historically low interest rates and they are much
more likely to go up than down. Especially taking into account
introductory teaser rates.

As long as housing is appreciating faster than the negative
amortization, life is good. Lenders will only allow the negative am
to go so high relative to the house value before foreclosing. High
LTVs mean there is very little room to move early on.

The situation we find ourselves in today, higher interest rates and
falling housing prices, even the author of the paper would agree are
likely to lead to foreclosure for ARM borowers.

I'm certainly not going to argue with stochastic expectation
integrals, but this is a good case of very precisely getting the wrong
answer, it simply doesn't take into account actual human behavior.

http://www.businessweek.com/bwdaily/...921_855992.htm
Surprise: 'Toxic' Mortgages Are the Best
A new study from professors at Columbia and NYU finds that the
"optimal" mortgage in a perfect world is an option ARM
by Peter Coy
BusinessWeek September 21, 2007

The paper

Optimal Mortgage Design by Tomasz Piskorski and Alexei Tchistyi can be
obtained from http://www1.gsb.columbia.edu/mygsb/f...20design%2Epdf