DO YOU HAVE AN ARM???

[Etaoin]

I know the author and the firm, so in the interest of protecting the guilty, I have substituted x's
for those names that would lead to identification of the firm and the author.
The author is president of a large credit union.


Dear Mr Berko:
11 Jul 04
Not too long ago I asked if you knew/had the ratio of ARM's to
conventional mortgages outstanding, or knew where that could be
obtained. You replied, quite honestly that you did not, and had no idea who did.
After _Much_ chasing around the bureaucratic circle, our Manager
(xxxxxxx) and I found the amounts recorded as _Issued_, by, the
Fed. Home Loan Bank. Whether or not this represents all currently outstanding loans,
(multiple billions) or even _All_ loans issued, I have no idea. There may well be
other 'outstandings' that are not even considered by FHLB. The numbers
that are available from FHLB show that since 1985, ARM's are 57.28% of all
home loans and, over the last five years, actually rose to 59.612%.

Many (most?) of those folks were, and probably still are, 'maxed out'
with debt to income, or they would not have taken ARM's in the first place.
If only half of the borrowers, conservatively I believe, are so
financially stressed that even a small increase in outflow will put them under
financially, as interest rates return to more normal levels (at least
4-6% higher needed to match the true level of inflation) these folks are
going to be unable to make all their payments and will face massive numbers
of foreclosures and/or bankruptcy's.

Another S&L fiasco in the making? In addition to the stupendous amount
of debt already heaped on a largely ill informed and unsuspecting public,
can our economy withstand another Federal (Public!) financial loss this
massive? How many banks and other institutions are holding FNMA, GNMA,
and other mortgage backed paper as 'Reserve Assets'? Some kind of Federal
bailout (us) is a foregone conclusion. Are we looking at another currency inflation such as
experienced in Germany after WW! (Not 2!) when people literally used wheel barrows to
take the paper currency to the bakers store to buy a loaf of bread? Alan
( Blackhole) Greenspan and confederates have already 'printed' so much phony
currency that inflation is skyrocketing, and plans more of the same.

Please tell me that this is all wrong, that we can absorb fiat,
worthless, paper currency forever. I'm afraid not.
Since your forte appears to lie more in the investment analysis aspect
of monetary affairs, what do you see as the safest (lowest risk might be a
better description) investment approach, based on your own take of our
economy and the future? My crystal ball is cloudy, but whether it's
steam, or an impenetrable film, I can't tell.

Regards,

xxxxxxxxxxxx Signature deleted by me.

[Estragon]

Jeff Immelt, CEO of GE, says the economy looks better than it has in several years, and predicts sustained growth.

ARMs generally offer an initial rate lower than the market rate on conventional loans, which is what makes them attractive to borrowers. With the discount rate at a 40-year low until the recent 25 basis point increase, these borrowers had to be aware that their rates were likely to be adjusted upward.

They are only harmed relative to those who chose conventional financing if rates rise rapidly, and there is no data to suggest that will be the case.

[Jeffrho]

[ QUOTE ]
Estragon said:
With the discount rate at a 40-year low until the recent 25 basis point increase, these borrowers had to be aware that their rates were likely to be adjusted upward.


[/ QUOTE ]True. I don't know why anyone would have gone with an ARM over the last couple of years, with rates as low as they are.

[jag]

For one thing, if your planning on living in a home for a short period of time an ARM is good.

Checking out the 1987-1993 period
Interest-rate caps weren’t triggered in our next example, despite rates that spiked in the early years -- before tumbling at the end:

Fixed-rate vs. adjustable-rate mortgages 1987-1993
30-yr. fixed Rate Payment 1-year ARM Rate Payment Comment
1987 9.20% $1,638 1987 8.07% $1,415 7.62% teaser
1988 10.38% $1,638 1988 9.37% $1,658
1989 10.73% $1,638 1989 11.19% $1,920
1990 9.90% $1,638 1990 9.92% $1,739
1991 9.64% $1,638 1991 9.25% $1,647
1992 8.43% $1,638 1992 6.58% $1,308
1993 7.99% $1,638 1993 5.91% $1,231
Total loan cost $125,000 Total loan cost $116,500


Our fixed-rate borrower paid about $8,500 more for the security of an unchanging payment -- or about $101 a month.Source (http://moneycentral.msn.com/content/Banking/Homefinancing/P77631.asp)

The letter was written about 1985 to 1990

We have an ARM and it has servered us well. I think it is important that you carry a small dept load though, therefore the risk is less when rates rise.

[Jeffrho]

True, but if you plan on living in a house for more than 5 or 6 years, fixed is the way to go. And with rates as low as they've been in the last couple of years, it made sense get in at a fixed rate as rates will only go up. I bought my home in 2000 and don't plan on moving anytime soon.
I re-fied my home 15-yr at 5.25% fixed in 2002. My payments only increased about 100 a month over my original 30-yr mortgage, but my loan costs much less, and I'm locked in to that low rate.