Malkin-Channeling Mortgage Market Musings
Alan Greenspan channels Michelle Malkin:
Bubbles cannot be safely defused by monetary policy before the speculative fever breaks on its own.
The Malkinesque version from late last week was more succinct, if less delicate: Suck it up.
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James Stewart of Smart Money channels Malkin:
Rate Cuts Alone Can’t Fix Financials
Stewart’s in-essence memo to the stock market, given its 2% temper-tantrum drop in response to a rate cut that supposedly wasn’t enough: Suck it up.
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This story should give thundering herd looking to freeze adjustable-rate mortgages (ARMs) willy-nilly some pause:
Many homeowners with ARMs stand to gain
The biggest beneficiaries of the Federal Reserve Board’s rate cut will be borrowers with adjustable-rate mortgages linked to one-year Treasury bills, says Greg McBride, senior financial analyst for Bankrate.com. About 1.8 million subprime adjustable-rate mortgages will reset in coming months, often to rates sharply higher than their initial “teaser” rates.
The decline in short-term interest rates will make the increases much less painful, McBride says.
The Fed cuts Tuesday and in October and September have caused one-year Treasury yields to plunge from 5% to just over 3%, McBride says.
On an ARM with a margin of 2.5 percentage points above the Treasury index, the new rate would be 5.7%, McBride says, instead of the 7.5% it would have been if the loan had reset in July.
For crying out loud, 5.7% is LESS than the current 30-year FIXED rate for golden credit, according to myfico.com this morning (5.799% for a score between 760 and 850). Treasury-indexed ARMs are about half of all ARMs, according to the article. Yes, I know that most of the rest are based on LIBOR (London Interbank Offered Rate), which is currently higher, but the idea that there is an across-the board, mammoth crisis is absurd.
My turn to channel Malkin: If people with ARMs that are at or moving to 7% or less who are in non-personal crisis situations think they’re going to get a lot of sympathy from the general public, I would suggest an alternative to looking for it: Suck it up.
And what about “fairness”? If profligates get help, and those in otherwise identical circumstances who haven’t been profligate don’t (because they don’t “need” it), won’t there be, and shouldn’t there be, a justifiable resentment factor? What if many of the former avoid foreclosure, and some of the latter fail to?
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UPDATE: A subscription-only Wall Street Journal editorial notes that Ben Bernanke should be added to the list of Malkin channelers:
False Savior
The Federal Reserve cut interest rates again yesterday, and equity markets promptly sold off because it was only a 25-basis-point reduction. This is probably good, if paradoxical, news. The Fed has become so Pavlovian in its response to Wall Street’s begging that even this modest declaration of independence is a welcome reminder that easier money is not the solution to every economic problem.
Short version: “Bernanke to the markets — Suck it up.”
Ordinarily, I would say exactly the same thing on an individual basis, “suck it up”, however, there are mitigating factors that could make the situation really bad for all of us. When someone takes the ARM route for a mortgage, what they are really saying is “I’m not going to live in this house for more than 3 to 5 years”, the average American household is very transitory. The problem here is liquidity in the housing market, on top of all of these people who were given loans on questionable income to debt ratios. That means ordinarily a foreclosure would not be necessary, they would put the house up for sale and within 2 to 3 months the financial problem is resolved because the house is sold before problems with the loan ensues. Because it now takes way too long to sell a house, those people can’t get out in time and thus end in foreclosure.
Why can’t they sell their homes? Because builders put up too many houses on speculation and they were given free reign to do so by the banks. In addition, builders did not have any secondary restraint on labor because of the failure of government to secure the borders. The home construction industry was filled with illegal labor thus allowing builders to build way more houses than they ordinarily could thus ratcheting up unsold housing inventories. Bottom line is you can’t have both speculative building and easy credit at the same time otherwise you get a glut, it’s one or the other, not both.
I have been trying to sell a condo for two years with no success. Had the banks and builders shown restraint in the first place, we wouldn’t be in this situation. IMO, no builder should be given a loan to build any house without first having a buyer signing on the dotted line. The speculative building of houses at this point has come to an end due to the banks finally substancially pulling out of the mortgage business. The problem now is, the excess inventory has got to be sold off, and banks are now being too tight in making new loans which means buyers and sellers are hindered in making transactions, so in the meantime the rest of us are screwed.
My point is government caused the problem in the first place by it’s failures (lending & illegals) and thus government is responsible to fix the problem they caused. If we let the market sort it out at this point, all the rest of us (who were living within our means) will get burned in the process, you do remember the S&L debacle with all that commercial property dumped on the market at once?
Comment by dscott — December 12, 2007 @ 11:07 am
dscott —
- Unfortunately, ARMs were used to “qualify” people for loans they couldn’t qualify for using a fixed-rate payment, not as a 3-5 year money saving tactic. BOTH parties (lender and borrower) should have known that; the claims of current ignorance by borrowers ring very hollow.
Your point about illegals is unfortunately valid (it was definitely true in SW Ohio).
In terms of external/govt. causes, the two “corporations” that are really companies with an implicit government fallback — Fannie Mae and Freddie Mac — lowered the credit-score approval thresholds for conventional and subprimes in 2004/2005 to the point where you could get a conventional if you should have been a subprime, and you could get a subprime if you had a pulse. I don’t know why they did this, but given their sacred cow status in congress and the background of many in their management, I have my suspicions.
I think there’s a place for spec building, but it requires a prudent lending market and intelligent borrowers and lenders.
Comment by TBlumer — December 12, 2007 @ 12:00 pm