Tuesday, April 04, 2006

Up in ARMs

In one of a million articles you will see over the next few years, USA Today says that some homeowners are having trouble paying their adjustable-rate mortgages (ARMs). None of this is news to me; it was only a matter of time. Anybody who bought or refinanced a house with an ARM in the last five years is just a damned fool. There, I said it. If you can't afford the fixed rates available since the late 1990s, you can't afford a home. I know people will give me b.s. about home ownership being "the American dream," but this is real life. Interest rates have been near historical lows for so long, apparently people have forgotten that they can -- no, they will -- go up. This whole country, government included, has been on an unsustainable, borrowing-fueled spending spree for too long. When President Bush brags about a high rate of home ownership and nearly 25% of borrowers have ARMs, he's really just bragging about a timebomb.

The article tries to get us to sympathize with an elderly couple whose ARM has gone from 7% to 10.5% in the last two years:
[Lorraine, age 72, said,] "At the time of the loan, they tell you, 'Well, it may go up, but it's probably going to go down.' You want it to be so, so you believe it."
Holy cow, did you sleep through the late 1970s??? It's one thing when 20-somethings fall for the smooth talk of mortgage lenders, but people who have lived more than a few decades have no excuse. Probably go down? Did you think the Fed was going to make interest rates go negative? There wasn't much room between the rate and zero when you got your ARM two years ago.

The housing market is going to collapse soon, and ARMs are the reason it will happen. And that makes me mad because it denies me the growth in real estate value that previous generations of Americans reaped. I wisely got a 30-year fixed mortgage at the ridiculously low rate of 5.25% a few years ago (refinanced from 7.25%, which was still a good rate). But now as interest rates rise, the idiots who got ARMs for 3% because that's all they could afford will be forced to sell or foreclose. It will be the worst disaster for the existing home market since the "white flight" of the 1950s and 1960s.

What good are ARMs in a low interest rate environment? Why let someone buy a house when he/she can't afford it over the long term? It makes the mortgage lenders happy. It makes the real estate brokers happy. It makes the sellers happy. The rest of us get screwed by their folly.

Anybody who needs an ARM to buy a home should not buy a home. Keep living in a crappy apartment for a few years until you can afford to get a fixed rate instead of playing Russian roulette with your financial future.


Chris said...

This is one time where I will wholeheartedly disagree with you -- we're saving so much money during the term of our ARM that it more than offsets what we may lose when refinancing back to a 30-year fixed toward the end of the ARM. That cash is funding my retirement ... and yes, we're prepared to go higher when we need to.

David Johnsen said...

I suppose you're taking issue with the "damned fool" statement in the first paragraph, but you're taking it out of context (consider the "If you can't afford the fixed rates..." sentence). I said it more directly in the last paragraph. Obviously if you are setting aside the difference for retirement, then you did not need an ARM to buy a home. You weighed the risks and chose one, which is a different matter. My primary concern is people who don't have any means to pay a higher rate and opt for an ARM. I'm willing to bet that most people with ARMs fall into that category, and those are the people who are getting into trouble now. The real estate industry pushes people into the most expensive property they can afford at the lowest possible rate, stretching them paper-thin.

The jury is still out, of course. You could have locked in a lower fixed rate to begin with, but now you'll have to hope nothing crazy happens before you refinance. Your timing will probably work out for you, but it doesn't make sense for most people to get ARMs in 2006. Many who do will lose their shirts. Rates will rise, and if property values slide, refinancing won't even be an option. How will they refinance when they owe more than the property is worth? With people putting zero to 10% down, this could happen quite easily.