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Another disinformation campaign to falsify the history of the mortgage crisis, and to double down on past failures.

Wall Street has a saying: Money talks, bullshit walks. Business is about money, not about empty words. The narrative is always framed around the numbers; never confuse words, or actions, with actual results.  Or as  Nate Silver said recently, "Peggy Noonan is very very talented at making bullshit look like a beautiful souffle."

To keep the vulgarity at a minimum I'll substitute the word "doublespeak" for "B.S." Doublespeak is used to obscure or distort the meaning of critical information in order to leave a false impression.

Take, for example, the case, made by a consortium of right wing think tanks, against the 30-year fixed-rate mortgage. It's complete and utter doublespeak. There is zero quantitative evidence, none whatsoever, to support their claim, which is that adjustable-rate mortgages are not significantly more risky than fixed rate loans. It's like saying your risk of heart disease stays the same whether or not you take up smoking.  

Right Wing Conspiracy of Silence

Which is why the doublespeak artists who argue against fixed-rate mortgages--at the American Enterprise Institute, the Cato Institute, the Heritage Foundation, the Mercatus Institute, and the Heartland Foundation-- adamantly refuse to engage in any discussion that examines loan performance over time. Their  right wing conspiracy of silence is part of a campaign to perpetuate The Big Lie that the  financial crisis  was caused by affordable housing policies.

Review any of the following pieces, and seek out any numbers comparing loan performance between ARMs and FRMs. You'll  come back empty-handed:

The Risky Mortgage  Business: The Problem with the 30-Year Fixed - Rate Mortgage

The Dark Side of the 30-Year Fixed-Rate Mortgage

The Dark Side of the 30-Year Fixed-Rate Mortgage, Part II

Housing Market Will Be Fine without 30-Year Fixed Loans

Do We Need The 30-Year Fixed-Rate Mortgage?

All of these authors engage in similar sleights of hand. They use words like "risky" and "safe" outside of any context, in order to create an impression of false equivalency.

None of them outdo Edward Pinto of the American Enterprise Institute, who perverts  the history of the S&L crisis in the early 1990s, and the recent financial crisis, by claiming they were caused by fixed rate mortgages:

New Bubble May Be Building in 30-Year Mortgages

Government Must Jettison the 30-Year Mortgage

[The reason why Barry Ritholtz says Pinto is "batshit crazy" is because of the ludicrous way he cherry picks facts to conform to his own biases.)

Alex Pollock, Before He Hewed To the Party Line

It wasn't always so. Money talked in September 2007, when Alex Pollock,  a resident fellow at the American Enterprise Institute, took note of what  $10.5 trillion in residential mortgage deb had to say. Testifyingbefore the Joint Committee of Congress, which convened a hearing on "The Subprime Lending Disaster and the Threat to the Broader Economy, " he focused on the numbers:  

A systematic regularity of mortgage finance is that adjustable rate loans have higher defaults and losses than fixed rate loans within each quality class. Thus we may array the serious delinquency ratios as follows:

  June 30, 2007

Prime fixed 0.67%      Prime ARMs 2.02%

FHA fixed 4.76%         FHA ARMs 6.95%

Subprime fixed 5.84%   Subprime ARMs 12.40%

The particular problem of subprime ARMs leaps out of the numbers. Also notice that FHA and subprime serious delinquency ratios for fixed rate loans are not radically different. The FHA is predominately a fixed rate lender, whereas subprime is about 53% ARMs. The total range is remarkable: the subprime ARM serious delinquency ratio is over 18 times that of prime fixed rate loans.

Source: Mortgage Bankers Association

In the years that followed and in the years that preceded Pollock's testimony, one metric in the mortgage has remained constant; Over time, ARMs always perform worse than fixed-rate loans by a lot.

Source: Federal Reserve

Lewis Ranieri's 35 Years Of Experience

Lewis Ranieri,  whose career in mortgage finance predated the advent of ARMs, which were first used in 1980, explained the problem to the Financial Crisis Inquiry Commission. "Remember," he said, "we kept experimenting with adjustable rate mortgages unsuccessfully for almost 20 years. Every single one of them blew up."  He emphasized that point directly to Alex Pollock at a working luncheon hosted by the U.S. Treasury on August 17, 2010:

Alex, I can give you a history of how many different types of floating rate loans we tried simply because the market wants more floating rate than it wants fixed. Every one of them blew up until Jim Montgomery created the California ARMs with caps and a floor. We never had a floating rate that didn't blow up on us. And that one is only a collar. All of these other structures that we have now never stood the test of time. You have nothing to prove to me that it's not going to blow up in your face.
Ranieri expanded the benefits of fixed-rate loans to the FCIC:
You know, it was always a 30-year fixed rate loan with a powerfulness, you know, the great news of a 30-year loan is you know what the payment is for the rest of your life. Have you underwriting that payment, you know, it's pretty predictable that a borrower gets fired or something, you can make the payment, right, and it amortizes. So everybody forgets how powerful the amortization feature is in a 30-year loan and that's why we picked it.

When we did this all the way back in the early '70s, it wasn't an accident. That structure is immensely powerful to both parties. The first thing you keep counting more and more is home, and the lender becomes more and more secure. So it handles the vagaries of economic cycles and personal disruptions very well, right?

But by 2010, Pollock was no longer willing to engage in a discussion about loan performance. He was not about to violate the information lockdown, and instead penned The Dark Side of the 30-Year Fixed-Rate Mortgage.

Actual loan performance interferes with right wing political agenda, which is to pervert history and claim that  the mortgage crisis was caused by government regulation and by affordable housing goals, and not  by Wall Street and not by systemic fraud.  Because there was only segment  of the mortgage market that performed better than prime fixed-rate mortgages, the mortgages acquired by Fannie Mae and Freddie Mac.  

Source: FHFA

If Necessary, Cherry Pick Numbers To Mislead

The exception that proves the rule is an  an economist at the Boston Fed named Paul S. Willen. He used loan performance data to make an argument against the 30-year fixed rate mortgage, but he cherrypicked his information in order to present a  very misleading picture.   It's hard to believe that anyone at the Boston Fed, or the Atlanta Fed, which posted his argument on its blog, would buy in to his nonsense.  

See if you can identify the doublespeak in Willen's testimony before the Senate Banking Committee on October 20, 2011:

So in Table 1 of my prepared testimony, I show some data that we put together, but everyone who has looked at the   individual level data, who has looked at it, the mortgage level  data or property level data, has come to the same conclusion.  Our sample is a sample of 2.6 million foreclosures, so these  are all borrowers who lost their home, and what we show is that  88 percent of them suffered no payment shock prior to defaulting on their mortgage. The mortgage payment they made  when they defaulted on the loan was exactly the same as the payment they made when they got the loan, the initial payment on their mortgage. In fact, of that sample, 59 percent of them actually had fixed-rate mortgages. That is something like 1.6 million mortgages. That alone should disabuse us of any notion that a fixed-rate mortgage is an inherently safe product.
Everyone came to what conclusion? That  a fixed-rate mortgage is an not inherently safe product?  People in finance don't think that way. Some mortgage products are safer or less safe than others, but nothing is "inherently safe."

Anyone who follows the mortgage markets would pick up on Willen's fallacy. Suppose Willen had said "in fact, of the total electorate, 56% of the people who voted for Obama were white. That is something like 37 million people. That alone should disabuse us of any notion that minorities were inherently important to Obama's reelection."

If you understand what's wrong with with that statement, you understand proportionality and one of Willen's little tricks.  It's certainly true that most of the votes for Obama came from white voters, because in the 2012 74% of the voters were white. But the key to his attaining a majority of votes was his vastly disproportionate support among among Latinos and African-Americans, who comprise a minority of the total electorate.

Willen excludes the fact that, of the universe of mortgages he considered, 80% of the originationswere fixed-rate. So, according to his numbers, the foreclosure rate for ARMS was twice as high as that for fixed-rate.

As for ARMs defaulting before their reset date, but he ignores the salient data. The vast majority of prime loans were fixed-rate, and the vast majority of subprime and Alt-A loans were ARMs. These loan products were used in order to minimize a borrower's monthly payment, irrespective of the longterm risks.   Plus, he ignores the fact that ARMs were most popular in the bubble states--California, Florida, Arizona, Nevada--where originators and borrowers tried to minimize monthly payments so that a mortgage would be "affordable." A huge percentage of securitized Alt-A and "prime" mortgages were interest-only or Option ARMs, when these mortgages went underwater, homeowners, who saw bigger monthly payments down the road, decided that there was no point in continuing to pay good money after bad.

In his prepared testimony, Willens kind of gave himself away. He referred to data that refuted his theory, but he simply refused to believe it:

It does turn out that fixed-rate mortgages default less often than adjustable-rate  mortgages, but that fact reflects the selection of borrowers into fixed-rate products,  not any characteristics of the mortgages themselves. In 2008, my colleagues and  I showed that even accounting for observable characteristics of the loans--such as credit score, loan-to-value ratio, payment-to-income ratio, change in house prices,  and change in payment--borrowers were more likely to default on adjustable-rate  mortgages than on otherwise similar fixed-rate mortgages.  The difference in default rates existed even for pools of loans where adjustable interest rates fell, further confirming that it was unobservable characteristics of borrowers, not of mortgages, that caused the difference. [Emphasis added.]
The money was talking, but Willens refused to listen. Instead, he clung to his "unobservable characteristics." Beware of economists who can rationalize away anything.

Cross posted at OpEdNews.

Mon Jan 14, 2013 at 1:37 PM PT: I got a sense through the grapevine that some people object to the fact that I was dismissive of connection between fixed rate mortgages and the savings-and-loan crises. I'm reminded that not everyone remembers what happened 20 or 30 years ago. So let me lay it all out.

 But first, let me remind everyone that this has nothing to with the actual loan performance of fixed rate mortgages, only some people’s selective memories.

In New Bubble May Be Building in 30-Year Mortgages one author says that the fixed-rate mortgage “was responsible for two taxpayer bailouts in the last 20 years.” This is nonsense.

First, the 20-year-old taxpayer bailouts of savings-and-loans, i.e. in the early 1990s, was very different from the S&L crisis of the late 1970s early 1980s.  No one who follows the financial industry would ever conflate the two. (You find this type of conflation and false equivalency all the time at right wing think tanks. It serves their “the-seeds-of-destruction-were-sewn-in-the-New-Deal…” mantra.)

This early 1990s S&L crisis was triggered by rampant financial abuses and mortgage fraud, which resulted from lax regulation. Thirty-year fixed rate mortgages had nothing to do with it.

As for the more recent bailout in 2008, the author is clearly referring to the government bailouts of Fannie Mae and Freddie Mac, the two largest fixed-rate lenders, by far. Fannie and Freddie both had razor thin regulatory capital requirements, which were based on stress testing that assumed a real estate downturn that mimicked that of the oil patch in the late 1980s, not the crash of 2007-2009. If F&F's statutory capital were, say, 8% or 5%, no government bailout would have been necessary at all.

For instance, over the past four years, Fannie Mae's annual losses on a $2.7 trillion mortgage book have averaged about 0.50%. Over the prior 36 years, the average was about 4 basis points. No mortgage lender, other than Freddie, has a similarly stellar record of loan performance. (Check out pages 82, 99 http://www.fhfa.gov/... )

F&F lost more money on interest-only mortgages and investments on Aaa-rated private label mortgage securities than they did on fixed-rate loans, which consitituted the lion’s share of their mortgage books.

Finally, there’s that old saw that fixed-rate mortgages caused the S&L collapse of the early 1980s. The problem is that nothing exists in a vacuum. People forget that when S&L’s financed fixed rate loans in the post war years, it seemed reasonable because everything else in the financial system was fixed as well. Foreign exchange rates were fixed by the Bretton Woods regime, interest rates paid on S&L consumer deposits were fixed at 50 bps higher than savings accounts at banks which were also fixed, (checking accounts could not pay interest), interstate banking was disallowed. When all that became deregulated and interest rates spiked, many S&Ls, facing a funding mismatch, became insolvent. But they would have been insolvent if the mortatges were fixed for 15 years or 10 years.

Today, mortgage securitizations, and interest rate derivatives, are used to address the issue of that type of funding mismatch. Which is why invoking the first S&L crisis, out of context, can be misleading.

Originally posted to Been There 1963 on Sat Jan 12, 2013 at 07:40 AM PST.

Also republished by Community Spotlight.

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Comment Preferences

  •  I was offered an ARM when I bought the house (23+ / 0-)

    I have now.

    I asked what it was: "Your interest rate goes up and down with the market">

    My question: Wh in the FCUK would I want that?"

    Took a fixed rate at about 6% in November 2001. Bought a huse that I could pay for even on unemployment and I'm still here.

    ARM was a scam through and through, to me. Maybe its one of those things that benefits the already-wealthy...

    The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men.

    by xxdr zombiexx on Sat Jan 12, 2013 at 07:49:57 AM PST

    •  We used an ARM when we bought our house (19+ / 0-)

      way back in the olden days, in 1984. Our ARM had a two point maximum annual rate increase, could float downward, and had a 5 point life of loan increase. At the time we took out the ARM, 30 year fixed rates were slightly higher than 5 points above our initial arm rate. In other words, in the worst case scenario, the ARM we got was better than the 30 year fixed rates that were then available.

      We saw our rate go up a few years, but it went down in more years. When fixed rates dipped to historical lows, though, we converted to a fixed rate.

      I have no earthly idea why anyone in their right mind would be going into an ARM with long term fixed rates so low.

    •  ARMs are probably better for wealthier people. (10+ / 0-)

      You take interest rate risk: you win if rates go down (compared to locking in a 6% rate), and lose if rates go up.  If they go up, wealthier people can pay it off.  People w/ good credit, wealthy or not, can refi into a fixed rate mortgage, but the problem there is that if the market tanks and the house value decreases to below required loan-to-value ratios, then refinancing becomes a problem.

      •  Note also that ARMs are prominent in the (1+ / 0-)
        Recommended by:
        nextstep

        Canadian market:

        Most Canadian residential mortgages have recently been rollover loans that amortize over a 25-year period but reset the terms every six months to five years. Reflecting a very conservative credit culture, the typical mortgage loan has recently been a five-year fixed-rate loan amortized over 25 years. However, terms have been shortening, amortization periods lengthening, and adjustable rates have been recently more popular.

        The mortgage insurers, including CMHC, started to insure 40-year  loans in 2006, but in July 2008 the government announced that it was pulling the maximum term back to 35 years and introducing a minimum five percent down payment (it had been as low as zero since 2004 for qualified borrowers).

        pdf  of IMF report.
        •  Your candor is, as always, refreshing (1+ / 0-)
          Recommended by:
          NancyK

          Because your clients make money on movement, no matter what direction.

          Instability and churn are good for certain professions, just not ours.....

          The "extreme wing" of the Democratic Party is the wing that is hell-bent on protecting the banks and credit card companies. ~ Kos

          by ozsea1 on Sat Jan 12, 2013 at 06:09:30 PM PST

          [ Parent ]

    •  We did the same thing... (7+ / 0-)

      and are still here, even thought income plummeted with layoffs.  We refinanced a peak bubble 30 year fixed rate (2000, 8.125%) to a 2001 15 year fixed rate @ 6.00% - payment went down.  

      12 years later and we are almost paid off.  We rejected the ARM out of hand because it was incredibly unethical and we also rejected the bank's notion that we should be buying "much more house" given our income and the potential tax deduction.  We live in a 1950s Cape Cod, not the McMansions everyone wanted us to buy, and we will own it very soon despite Wells Fargo's attempt to lure us into a bad deal.  

      Reaganomics raped the American worker & this depression is the result. When will we wake up & vote with our own financial interests?

      by phree on Sat Jan 12, 2013 at 12:31:56 PM PST

      [ Parent ]

  •  Interest will eventually go up and the MoneyMen (16+ / 0-)

    want the masses to be on the hook for these future higer rates.

    Don't need any charts and reports to know that.

    Notice: This Comment © 2013 ROGNM

    by ROGNM on Sat Jan 12, 2013 at 07:56:50 AM PST

  •  Wow. Thanks for this. (16+ / 0-)

    I didn't even know that these ideologues were actually tying to undermine the 30 year mortgage. But disinformation is how these dudes roll. Naomi Klein's The Shock Doctrine underscores this point-they live by disinformation at the macro- and the micro- levels....

    "There's no ideology [t]here [on the right]. It's just about being a dick." Bill Maher, June 22, 2012.

    by caseynm on Sat Jan 12, 2013 at 07:59:35 AM PST

  •  Good info (10+ / 0-)

    I think a fixed rate is the best option for most people, I have one.

    ARM's are riskier, and given how low rates are today they don't make a huge amount of sense.  When rates go higher, ARM's may make sense in specific situations, since there will be more of a difference in fixed rate interest rates vs. ARM interest rates.  For example:

    1.  You might know for sure you will be moving within 5 years.  If you get a 5/1 ARM (fixed for 5 years, then changes with the interest rate) you might get a lower rate, but still have a fixed loan for the whole time you have the house.

    2.  You might have enough assets to pay off the house entirely, but not want to commit them to the house.  You can get an ARM if you know you can pay it off right away if you needed to.

    Those are pretty rare situations.  For the average person who would be affected by a jump in mortgage payments, fixed rate is the way to go.

  •  13 Years Ago My Husband And I Went Looking (10+ / 0-)

    for a loan to build our house.  Every bank would offer a variable loan, but not a fixed rate.  My husband told each and everyone to go take a hike.  We finally found a local bank that gave us a 15 year fixed rate loan.  We built our house and will have paid off our mortgage of August of this year.  We even refinanced during this time to a lower interest rate for a 10 year loan which ended up being in reality a 14 year long which saved us a year in paying off the mortgage.  If we would have listened to those banks that were offering variable rate loans we would probably be one of the millions who have lost their homes because the interest rates went up so high they couldn't make payment anymore.  My children have listened to my husband an I and have gone with fixed rates on buying their homes.  Also, going with a 15 year fixed rate loan saves tons of money down the road.  

    "Don't Let Them Catch You With Your Eyes Closed"

    by rssrai on Sat Jan 12, 2013 at 08:25:38 AM PST

    •  I had a 30 year fixed rate mortgage. (1+ / 0-)
      Recommended by:
      foresterbob

      When it was paid off, I figured out that I had paid 3 times the stated purchase price. It's now worth about 3 times what I paid for it. So if you ignore the opportunity costs, if I were to sell it now, I will have lived cost-free for the past 30+ years.

      Interesting note: When we bought it, we assumed the existing VA loan. I don't think assumptions are even considered now. And at the time we bought it (1979), ARM's were just beginning to be an option.

  •  we wouldn't have 30 year fixed mortgages (2+ / 0-)
    Recommended by:
    Kane in CA, Clytemnestra

    but for government subsidy.

    •  Are you talking about (6+ / 0-)

      the GSE's?

      This whole controversy kind of confuses me. I don't think it's a progressive/conservative thing, the parties making the arguments notwithstanding. From a political perspective, there is nothing liberal about fixed rate mortgages, or conservative about variable rate mortgages.

      I suspect this controversy (if there really is one), is more driven by mortgage investors. (and if you think that means conservative bankers, you're wrong. I suspect one of the largest owners of mortgage debt are pension plans.)  Investors are rightly concerned that interest rates will rise dramatically and they'll get stuck holding the bag with nothing but fixed rate mortgages.

      Ultimately, the market will determine which is available. If we see interest rates rise, fixed rate mortgages will rise even faster and variable rate mortgages will be the more attractive/affordable option.

    •  Its not govt subsidy (3+ / 0-)
      Recommended by:
      ozsea1, nicolemm, Chas 981

      Its a guarantee against default.

      The 30 yr note is a reflection of the post WWii housing boom.

      I don't think we wantto go back to the 5 yr mortgage from the prewar years...

      •  Why not? (0+ / 0-)

        If it's what the market supports, it's what the market supports.

        (-5.50,-6.67): Left Libertarian
        Leadership doesn't mean taking a straw poll and then just throwing up your hands. -Jyrinx

        by Sparhawk on Sat Jan 12, 2013 at 05:17:10 PM PST

        [ Parent ]

      •  Yeah, it's a fucking government guarantee against (0+ / 0-)

        default.  That's a subsidy.  

        Shouldn't be too difficult to understand.

        •  The 'gubmit' subsidizes a lot of things (3+ / 0-)
          Recommended by:
          HM2Viking, Chi, Whirlaway

          your beef on this one is....?.....

          The "extreme wing" of the Democratic Party is the wing that is hell-bent on protecting the banks and credit card companies. ~ Kos

          by ozsea1 on Sat Jan 12, 2013 at 06:13:20 PM PST

          [ Parent ]

          •  and the problem ks what? (2+ / 0-)
            Recommended by:
            ozsea1, elginblt

            When I think of subsidy it seems that it involves direct cash payments or writeoffs.

            In this. Case it hardly qualifies for either test.fh, va guaranteed loans have much lower default rates  than the conventional mortgage market. The fancier products aappear to be used as and run around normal lending standards.

            I will grant that fha/va loans are a "subsidy" for borrowers as they provide a mechanism for access to financial markets. Borrowers pay an insurance premium every month against default.

        •  You seem to be missing a few things: (1+ / 0-)
          Recommended by:
          tommymet

          It was never a guarantee until September 2008:

          The "implicit guarantee," which never involved cash, enabled F&F to amass a very large diversified, and well-performing mortgage portfolio.

          1. F&F's loan performance was exponentially superior to any other segment of the market.
          A few metrics:
          a. F&F's credit losses over the past four years are about $210 billion, when they financed about $4.5 trillion mortgages;
          b. The credit losses on $2.7 trillion bank mortgages over that same period was about $240 billion
          c. The credit losses on private label mortgage securities, including CDOs, were about $850 billion.
          d. [Don't know how much was lost by Ginnie Mae or other lenders.]
          But about 17% of the credit losses were borne by F&F.

          More than half of the government funds extended to F&F are scheduled to be repaid by the end of 2014.

      •  Sure we do, as long as incomes go up to the point (2+ / 0-)
        Recommended by:
        Odysseus, elginblt

        that we can reasonably pay off a house in 5 years.

  •  I think people should buy the cheapest house they (10+ / 0-)

    can manage to live in!  

    •  No recommendations yet?! (4+ / 0-)

      If it weren't for all the pressures to buy the most house possible based on affording the first year's payments, we wouldn't be in this mess. People would have had safety margins to deal with economic change, and houses would have been better suited to the market and easier to get out of.

      Great point from edr.

      •  not sure how many were like that (1+ / 0-)
        Recommended by:
        elginblt

        I was unfortunate enough to buy in 2005. It's fixed rate but starts out interest only then balloons. I figured I'd refi at the first opportunity ( after all I'd done that a few times before) and  my priority at the time was getting to an address my ex-boyfriend would not know. I had  a restraining order , but we would all feel safer if I did not have to use it. So my new place was roughly the same size and price as my old place. I had a nice down payment from the equity in the old place, though it somehow ended up smaller than expected from some mysterious fees.

        Now I am way underwater and it seems no one wants to help except Occupy Homes.

        -7.75, -6.05 And these wars; they can't be won Does anyone know or care how they begun?-Matt Bellamy

        by nicolemm on Sat Jan 12, 2013 at 10:59:39 PM PST

        [ Parent ]

  •  All of this (23+ / 0-)

    bullshit is designed to disquise the very simple and obvious fact that the housing price and mortgage market crashes were failures of the private markets.

    Which conservative and libertarian economic ideologies insist cannot happen.

    The next time someone tries to blame the Community Reinvestment Act, tell them that loans issued under the CRA outperformed the private market in all years, without exception.

    When they shift the subject to Fannie Mae, inform them that not only did GSE-purchased loans outperform the broader market, but that the subprime and Alt-A loans that destroyed the housing market couldn't have been a GSE problem, because Fannie and Freddy were prohibited by law from buying them.

    The fundamental problem with the housing market was prices. Based on historical data, the 2000's real estate boom should have ended in 2003. That's when price / income ratios hit their peaks in the previous cycles (about 8:1, IIRC), going back as far as data exists. The only thing that allowed prices to continue to rise (to around 15:1 in San Diego) for the next 4 years was changes in mortgage financing, and those products, (no-doc, stated income, payment option ARMs, all the rest,) existed only in the private markets.

    The government and quasi-governmental agencies that the right wingers try to blame for the cash weren't buying or offering those producs... because it was illegal. In fact, Fannie Mae executives were screaming for permission to play n those markets, because they were losing market share.

    It's all bullshit, folks. It's bullshit, and it's bad for you.

    -Shannon

    "It is better to die on your feet than to live on your knees." -- Emiliano Zapata Salazar
    "Dissent is patriotic. Blind obedience is treason." --me

    by Leftie Gunner on Sat Jan 12, 2013 at 10:41:08 AM PST

    •  Without question (2+ / 0-)
      Recommended by:
      auditor, Whirlaway

      The right wing crackpots, and their  shills in the media, want to blame the government programs that performed extraordinarily well.

      For example,  for 36, years between 1971 and 2007, Fannie's average annual loss rate on its portfolio was about 4 basis points and never higher than 13 basis points. Since then, during the worst real estate crash in American history, its annual loss rate has never come close to 1%.

    •  Fannie & Freddie Execs prosecuted for fraud (1+ / 0-)
      Recommended by:
      Sparhawk

      You may want to retract your comment based on the facts.

      You are repeating the fraudulent statements from Fannie and Freddie made before their executives were charged by the Obama Administration's SEC for fraud.

      The mortgage executives prosecuted by the SEC for the financial crisis are overwhelming the Top Executives from Fannie & Freddie see SEC: Mortgage Execs Took Pains To Hide Risky Loans

      Ever since Fannie Mae and Freddie Mac were taken over by the government in 2008, questions have swirled over who was responsible for their collapse. Friday, the Securities and Exchange Commission weighed in, filing fraud charges against former Fannie Mae CEO Daniel Mudd, former Freddie Mac CEO Richard Syron and four other former executives.

      Federal officials say the mortgage giants lied to investors about the number of subprime loans they had on their books at the height of the credit boom. They also say the executives knew what was happening and even encouraged the deception.
      ....
      The SEC says both companies loaded up their balance sheets with many billions of dollars in risky subprime mortgages. By 2007, investors were starting to ask questions, says Guy Cecala, publisher of Inside Mortgage Finance.

      ...

      So, the SEC says, both companies took pains to conceal their holdings from the public. SEC enforcement director Robert Khuzami said Freddie Mac reported in its 2006 annual report that its subprime holdings were not significant.

      "In fact, the company had $141 billion of subprime exposure to loans it internally described as 'subprime' or 'subprime-like,' representing 10 percent of its single-family portfolio as of Dec. 31, 2006," Khuzami said.

      The most important way to protect the environment is not to have more than one child.

      by nextstep on Sat Jan 12, 2013 at 12:08:55 PM PST

      [ Parent ]

      •  The big ways that you are flat-out wrong.. (5+ / 0-)
        Recommended by:
        TKO333, ozsea1, tommymet, Odysseus, elginblt

        1. The SEC lawsuit has nothing to do with actual losses.

        The SEC never challenged the actual delinquency, default or loss rates on F&F's portfolio, which compared to any other segment of the market, are remarkably good. The SEC only said that F&F understated the levels of "subprime" and "Alt-A" loans on the books. To put it charitably, it's a tough case to make, since there is no commonly accepted definition of "subprime or "Alt-A".

        This is another example of how people talk about "risk," outside of any financial context.

        2. There is no dispute about why F&F collapsed.

        Their statutory capital requirements were never based on a stress test that contemplated a housing crash like the one we saw. So their losses could not be absorbed with capital equal to about 2% of their total mortgage books. If F&F were capitalized like a bank, i.e. 10% of assets, it would be much stronger than Citi or BofA.

        3. Nothing refutes the fact that Fannie and Freddie's credit performance has remained the gold standard for many decades.

        http://www.fhfa.gov/...

        Look at p. 82 of the FHFA's report to Congress. It shows that, between 1971 and 2007, 36 years, Fannie's losses as a percentage of its mortgage book averaged 4 basis points. Over 2008-2011, the worst housing crash in memory, Fannie's annual losses were about 0.5%.

        That's why Joe Nocera and others refer to the F&F-caused-the-crisis meme as "The Big Lie."

    •  the CRA only affects depository institutions, (4+ / 0-)

      and those banks weren't making "funny money" loans, because they were restricted from doing so, by law. but racists do loves them some racism, facts be damned.

  •  This Must Be The Beginning (7+ / 0-)

    of a campaign to end 30 year fixed rate mortgages.  From reading here I assume the 30 yr one is not as profitable as the others are.

    I bought my home in 1987 with a 30 year fixed, refinanced twice to lower rates then went to a 15 year one.  Always got fixed rates.  Never wanted to worry about waking up and finding my rates and payments going up.   Have enough problems with property taxes always going up don't need to worry about the mortgage rate too.

    Bad politicians are sent to Washington by good people who don't vote.

    by Renie57 on Sat Jan 12, 2013 at 11:00:18 AM PST

  •  ARMs are great if done right. (6+ / 0-)

    The biggest problem with ARMs was their use in allowing people to qualify for a larger mortgage.  Qualifying for an ARM should be done using the highest interest rate the ARM can have over its life.  If this was done, the max mortgage principle for a given mortgage would be lower for an ARM than a fixed rate not higher.

    ARMs are best suited for disciplined borrowers and more knowledgeable borrowers.  It is also based on what competing rates and terms for ARMs are Vs fixed rate - sometimes one is better than the other.  The best way to use the ARM is to make the payments that the fixed rate would have been.  In this way, the principle gets paid off much faster and you can reach the point after a few years where even if the ARM rate went to its maximum, the monthly required payment is lower than the original fixed.

    The most important way to protect the environment is not to have more than one child.

    by nextstep on Sat Jan 12, 2013 at 11:48:34 AM PST

    •  Exactly (5+ / 0-)

      The problem with ARMs was not the adjustable rate itself, but the fact that they were shopped to less sophisticated borrowers (effectively preying on them.)  You hear that your monthly payment will be $x, and a lot of people probably didn't think of the possibility that the monthly payment could go up at some point.

      28, white male, TX-26 (current), TN-09 (born), TN-08 (where parents live now)

      by TDDVandy on Sat Jan 12, 2013 at 03:13:36 PM PST

      [ Parent ]

  •  ok, i have to admit, i was a little baffled, by (7+ / 0-)

    the title of your piece. as a cpa, fixed-rate mortgages are always, always, always the preferred type, for the borrower, so i couldn't figure out why anyone would be against them. having started to read this, i now see what you meant. by definition. adjustable rate morgages are always riskier in nature, because the people they're generally offered to are higher risk borrowers. they are also a huge profit generator for the lenders, so they loves them some ARM's!

    carry on!

    •  They're a huge profit generator (2+ / 0-)
      Recommended by:
      tommymet, elginblt

      until the borrower can't make the payments...

      28, white male, TX-26 (current), TN-09 (born), TN-08 (where parents live now)

      by TDDVandy on Sat Jan 12, 2013 at 03:14:19 PM PST

      [ Parent ]

      •  Done "right", they should generate enough money (1+ / 0-)
        Recommended by:
        elginblt

        before the loan resets that even if the borrower stops making payments when that happens, they can at least break even on the payments + selling the home in foreclosure. Unless the entire market collapses, as happened. At a 5% interest rate, the borrower will pay over 1/4 of the cost of the loan during the first 5 years before the loan resets.

        •  We tend to forget that a lot of loans were placed (3+ / 0-)
          Recommended by:
          NancyK, elginblt, semiot

          by mortgage brokers, who got paid commissions based on how good or how awful, from a buyer's point of view the terms of the loan were. Loans riskier to the borrower and more profiteable to the lender got larger mb commissions.

          A few years back when I was in NY, brokers were pushing negative amortization loans for one example,  where missed payments would be added to the principal, and peddled them to young doctors. One of the problems then with mortgages, especially ARMs, was that the actual paperwork for the loan only appeared at the closing so the mechanics of what happened if X or Y happened which were in the mortgage often got skated over as what the buyer checked was basically what he had been told by the mortgage broker,  and whose lawyer was pithily informed that no changes could be made and the closing would blow up if there were any objections, in the hearing of the buyer, and which mortgage broker was out of there long before the loan went sour, commission in hand.
          And such brokers also 'helped' their buyer customers qualify for loans, which meant a bit of fiddling in a number of cases to make the underwriting come out the way the broker needed to get the damned loan closed, even if that underwriting would if done correctly not have allowed the loan to close.  I guess Rs don't admit that.

  •  The party of business (4+ / 0-)
    Recommended by:
    a2nite, Christy1947, foresterbob, elginblt

    Hard to understand how the party of business has no clue what happened thanks to Wall Street.  The Gramm-Leach Bill that passed in 1999 ( that I and many in real estate protested) not only eliminated the wall between investment banks and savings banks, but stated that they could ignore state real estate law (which is the basis for law in the US) and get a pass on prosecution.  Thus the mortgage market was taken over by investment banks who in the spirit of economy never hired enough people to underwrite the loans and quickly sold them off to investors buying blind under false credit ratings.  This story has been told billions of times, but in any comment section the Republicans will blame the government for giving "minorities" bad loans, blame the borrowers for fraud and blame the mortgages themselves for the defaults.  I never knew crime could be so easy although some foolish small mortgage brokers are now in jail.  Fat cats walk free.

    •  Crime pays if you're evil rich (3+ / 0-)
      Recommended by:
      WheninRome, HM2Viking, foresterbob
      •  Not always. Countrywide was sold to CIti,IIRC (2+ / 0-)
        Recommended by:
        elginblt, LillithMc

        and the operators of Countrywide, a vast morass of bad paper, got off scot free, and Citi ended up holding the bag. Countrywide's management was also legendary for holding up what I remember as Fannie, making them buy bad loans and guarantee them or be denied all loans originated by Countrywide and its subprime affilaites which would have destroyed the volume F depended on.  

        And the Rs bear responsibility because until Gramm Leach the banks couldn't themselves package securities made of of mortgages made by the bank, and had to go through F and F, but afterwards, they could make up and sell to investors their own packages, which stunk, and invented and used MERS to try to get themselves out of the middle and holding any bags when those packages went sour.

        •  Couple points (0+ / 0-)

          Countrywide went to BofA, but the rest of that is pretty on point, except their CEO, Angelo Mozilo was eventually charged by the SEC for insider trading and fraud. His cash settlement was the largest ever for these kinds of charges (over $60M if i remember correctly), though claims that he got off easy aren't overstated.

          On Gramm Leach Bliley, it's easy to blame the Republicans, it was passed with a veto proof majority before being signed by Clinton. But arguments that it was the brainchild of Clinton's treasury secretary, Robert Rubin, and supported by then Clinton and now Obama advisor Larry Summers are not without merit. They wanted it. They got what they wanted. If I remember correctly, Joe Biden voted for it.

  •  Somewhat OT, but (1+ / 0-)
    Recommended by:
    elginblt

    I object to this statement:

    But the key to his attaining a majority of votes was his vastly disproportionate support among among Latinos and African-Americans, who comprise a minority of the total electorate.
    Obama did not receive a vastly disproportionate share of the Latino and AA vote. On the contrary, Romney received a vastly disproportionate share of the white vote.

    (It's all in how you look at it ;-)

    Let us all have the strength to see the humanity in our enemies, and the courage to let them see the humanity in ourselves.

    by Nowhere Man on Sat Jan 12, 2013 at 02:33:10 PM PST

  •  Fixed rates are always better, (0+ / 0-)

    if the interest is higher, you can write that off. Lower interest isn't always better.

    Owner take backs are the best. I have both purchased and sold with this method.

  •  asdf (2+ / 0-)
    Recommended by:
    Odysseus, nicolemm

      If I can add anything - all I can say is that folks need to be prepared to walk away.   When I purchased my home, I  knew the current Mortgage Rates and did KISS math and knew what I was comfortable paying.   When I met with the agent - I said this is what I want, this is how I want it to be financed and this is what my house payment (inclusive) should be.
        In most instances, it needn't  to be overly complicated, or rocket science - but I may be the outlier on this.

  •  The real issue (4+ / 0-)
    Recommended by:
    musiclady, ozsea1, Odysseus, elginblt

    Financiers don't make enough money when homeowners refinance for better terms.

    Funny how they don;t like the free market when it helps consumers.

  •  How the Army saved me from financial ruin (7+ / 0-)

    In 2004 I had just moved to Monterey CA and wanted to buy a house.  I had watched home prices in Maryland double during my three years there and was bummed about "missing out" (we lived in post housing).  We found a great house that had just been flipped by a nice couple.  They were motivated to sell because they were already working on a new house and getting crushed by two mortgages and two remodeling loans.  The price for this bargain - $840,000.  My income at the time including my housing allowance was just above $100,000 so I was not even close to the 3-1 rule on home affordability.  Then the mortgage broker started talking.  The loan was going to be a 3 year interest only adjustable jumbo balloon rainbow blah blah blah.  Bottom line I would be able to afford it...at first.  And I almost went for it.  As we got down to the details he started asking about my wife's income.  She wasnt working.  Did she have a home business?  No.  Could she start one?  Why?  Well if she had a few hundred dollars of income a month it would help speed things.  Not that it would change any terms of the loan, just to speed things along.  Thats when my alarm bells started going off.  See, I have a security clearance and I was coming up on my periodic reinvestigation.  And I was due for a polygraph.  The Army frowns on lies.  Security folks frown on financial lies (#1 indicator of spying).  Im a very bad liar according to all of my polygraphers.  In a battle for my soul, the Army won and instead of moving into a dream house, we moved into a small rental - the only thing we could actually afford.

    Had I bought the house I would have been trying to sell in the worst housing market in decades.  After 3 years when all the smoke and mirrors cleared I would have been staring at a monthly payment that was over 50% of my income.  I probably could not have sold without taking a huge loss.  Because of my job, bankruptcy is not an option so I would have had to liquidate all of my savings and probably a lot of my personal property.  Even then I might still have had a huge debt to service.

    In 2011 we bought a house in Colorado for $330,000 - well under 3x my current income.  We have a 30 year fixed loan of 3.75% - less than my first car loan.  Other than minor increases for property taxes and HOA fees, my loan will never go up.  My savings that were NOT wiped out by a sleazy mortgage broker are almost enough to make the months payments for the life of the loan.  I am this close to being able to guarantee that I will always have a paid for home even if I cant work.  

    30 year fixed rate loans were designed when doing the right thing was still the guiding principle for bankers.  Designed by bankers who were members of the community, who went to church with the people they lent money to and whose kids played football and baseball with their customers kids.  They were good business and good for the community.  Anything that says its "better" than that is probably snake oil.

    It is well that war is so terrible -- lest we should grow too fond of it. Robert E. Lee

    by ksuwildkat on Sat Jan 12, 2013 at 05:22:13 PM PST

  •  I've had arms, neg ams, and arms with neg ams. (2+ / 0-)
    Recommended by:
    foresterbob, Been There 1963

    I've had arms tied to prime in first position at incredibly low rates (or so I thought).  And I've had fixed rates.  

    What I've learned after being involved with hundreds of loans in one way or another is that the author is absolutely right.  

    An arm has much higher risk.  What if you don't move as you expected before the rate adjusted?  What if your home value went down, your equity isn't there and your refi ratios are off and you can't refi?   Any number of things can come up.  

    If someone gets an arm, they get a lower rate.  But, that lower rate comes with higher risk.

    It's been my experience that if you don't pay cash for a house, then get a 15 year fixed rate with at least 20% down.  This is ideal.  

    "If the misery of the poor be caused not by the laws of nature, but by our institutions, great is our sin." Charles Darwin

    by Rockydog on Sat Jan 12, 2013 at 08:01:19 PM PST

  •  Outstanding! (1+ / 0-)
    Recommended by:
    Been There 1963

    thank you

  •  BS! this is how people get into trouble (1+ / 0-)
    Recommended by:
    elginblt

    fuck!

    every adviser we had told us what we already knew -- get a fixed rate mortgage.  We wouldn't have bought a house without a fix rate mortgage

    no arms
    no float
    no adjustable rate
    no balloon

    Which is why the doublespeak artists who argue against fixed-rate mortgages--at the American Enterprise Institute, the Cato Institute, the Heritage Foundation, the Mercatus Institute, and the Heartland Foundation-- adamantly refuse to engage in any discussion that examines loan performance over time. Their  right wing conspiracy of silence is part of a campaign to perpetuate The Big Lie that the  financial crisis  was caused by affordable housing policies.
    Why must everything be a gamble to these people?  At least those of us who are risk adverse could at least buy a house with some confidence and less stress by having a fixed rate loan.  

    "Less stress" than a 30 year mortgage, gambling that you will have a job and no major medical issue that will put that house in danger.

    We always taught our children, whatever you do, don't bet the house.

    Bumper sticker seen on I-95; "Stop Socialism" my response: "Don't like socialism? GET OFF the Interstate highway!"

    by Clytemnestra on Sat Jan 12, 2013 at 09:26:31 PM PST

    •  Everything has to be a gamble... (4+ / 0-)

      for right wingers because that creates more social instability. More social instability creates more opportunities for predatory operators to exploit people in all kinds of ways. The Republican vision of society is based entirely on this sort of predator-prey dynamic, rather than any sort of idea of promoting the common good.

      I'm not exaggerating here: I really think that most Republicans view ALL interactions with other people as opportunities for exploitation. Ever spent much time on right-wing websites? Even the religious Republicans are constantly trying to scam each other into buying snake oil products, "newsletters". This warped view of life extends into their political operations, which are also mostly attempts to scam each other out of money.

      Republicans have replaced all care for society, for social stability, and for shared prosperity, with a sort of new religion based entirely around the venal, merciless pursuit of short-term get-rich-quick schemes. You can see it everywhere, and this is just the latest example.

  •  I'm stunned... (3+ / 0-)

    ...to hear that anyone (other than a mortgage company) would ever champion an ARM to your typical middle class homebuyer.  I've worked in both real estate and finance, and an ARM is the LAST thing I'd ever recommend to anyone who doesn't know with absolute certainty that they will have the raises or the funds to pay for it.

    The first time I heard about ARMs was at a friend's home back in the late-'70s.  They'd gotten an ARM and had invited a bunch of us over to hear all about this great idea from their loan salesman.  This was when inflation was in double digits and wages stagnating.  All of us were just starting out.  The speaker assured us that as our salaries went up, we would be able to pay for the increases in our loan payments.  You know,  rising tides lift all boats?

    I raised my hand and asked, "What happens if my wages don't go up?"  His answer was "Oh, but they'll always go up!"  To which I said a second time, "But what happens if they DON'T."  He refused to answer my question, and I knew then that ARMs were a terrible idea is you didn't have a guarantee that you'd always be able to afford one.    

    If you're a risk-taking gambler, then by all means, get an ARM and take a chance on utter disaster, but if you're an ordinary person who likes knowing what your bills will be every month, then run as fast as you can from an ARM.  Remember, mortgage companies don't really hate repos all that much.  You insure them against your default when you have to pay for mortgage insurance and they get to turn around and re-sell your house for more money when the economy gets better.  They ARE risk-taking gamblers.  Never, ever forget that.

  •  There is a time and a place for taking risks, (1+ / 0-)
    Recommended by:
    elginblt

    and I've taken some financial risks. But when purchasing a home, I have always gone for the fixed rate loan, at the shortest term that I can afford.

    Thirteen and a half years ago, I bought my current home, financing it with a 15 year fixed mortgage. About halfway through the loan period, I "renegotiated" the interest rate (paid one point on the principal balance, but avoided the other hassles that come with a full refinance).

    Every month, I knew exactly what my payment would be, down to the penny.

    In another 18 months, the house will be paid off. Given the fact that interest rates declined after 1999, I might have been money ahead with an ARM. But that was unknowable at the time. I saw what happened to interest rates in the early 1980s. I'm happy with the peace of mind that came with choosing a fixed rate loan.

  •  What's new? (1+ / 0-)
    Recommended by:
    NancyK

    The right wingers coming to the help of their bankster friends!   What a surprise!

    Consider this.  The rates for 30-year fixed rate mortgages (FRMs) are now somewhere in the vicinity of 3.375%   If interest rates rise in the future, banksters who have lent money to you at that rate (for 30 YEARS) will find themselves having to pay HIGHER interest rates on much shorter term savings accounts and CDs  (currently they are paying about 1.8% or so interest on a 5-year CD; if rates rise, they will have to pay much higher rates of interest, possibly higher than the 3.375% you will be paying them if you are on an FRM)

    But if you are on a 5-year ARM, say at 2.5% now, those banksters will be able to hike the interest rates after 5 years, to 5% or 6% or even higher when interest rates rise in the future.

    But if you have an FRM, they are stuck!  And this can seriously dent their profits and the right wingers wouldn't want their bankster buddies to "suffer" that way.  So, they would want us to get screwed so that their bankster pals can continue to rake it in.

    So what's new?!

    (-7.75,-5.64) "Ayn Randism - Even though you don't have much, you can still feel rich, simply by having contempt for the poor."

    by Whirlaway on Sun Jan 13, 2013 at 06:51:47 AM PST

  •  Not clear to me why? (0+ / 0-)

    Not clear to me why the right is so against 30 year fixed rate mortgages?

    •  It's about who benefits (0+ / 0-)

      SOMEONE benefits from ARM's and someone else might very well benefit from defaults. The immediate benefit of an ARM from the investment perspective is that, if you hold a mortgage and interest rates go up, your income goes up as well, provided the homeowner continues to be able to make payments. In case of default there is another class of investor that benefits.

      Adjustable rate mortgages do provide a benefit to a certain proportion of homeowners: those who can't quite qualify for a fixed-rate mortgage but whose income is reasonably well-assured. I in fact am among those people. I bought my home nine years ago. I live in a high cost area and would not have been able to live where I do were it not for the lower initial rate of my mortgage. But my job is very secure and I knew I could keep paying the mortgage while paying down the balance to the point where I'd be able to refinance with a fixed-rate loan. But by far the greater benefit to ARMs accrues to the sellers of properties (particularly builders) and to lending institutions that want to get rich quick because the lower initial interest rate will allow properties to sell for more and will allow more loans to be made.

      Fixed rate mortgages benefit homeowners and responsible investors. Adjustable rate mortgages, while they do provide a benefit to people in my position, mainly benefit those investors whose principle motivation is greed.

      As to the benefits of defaults, those are a bit tougher to explain but to the best of my limited ability here I would suggest that to an investor with lots of cash, there's something to be gained from amassing a large portfolio of properties.

  •  Actually (2+ / 0-)
    Recommended by:
    sfbob, Been There 1963
    Wall Street has a saying: Money talks, bullshit walks.
    Bah.  My mom taught me this basic rule of life and she was from the sharecroppin' south.

    In all seriousness, an important diary.  Tipped and recc'd.

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