Thursday, June 16, 2005

NYTimes: 'The Trillion Dollar Bet'

In yesterday's NYTimes article there was a phenomenal article about interest rates, mortgages and real estate. Here are the highlights and some of my comments:

  • "American homeowners have made a trillion-dollar bet that mortgage rates will remain near record lows for at least a few more years. But with some interest rates already rising, economists worry that the bet could turn bad." Exactly.
  • "This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted. But in 2007, the portion will soar, with $1 trillion of the nation's mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis. " A trillion dollars is a huge amount of money.

  • "Consider a typical $300,000 interest-only mortgage with fixed payments for the first five years The homeowner would start by paying about $1,250 a month. If interest rates rise modestly over the next few years, as many forecasters expect, the payment will jump to almost $2,100 in 2010, according to Stephen Barrett, the owner of Redmond Financial, a mortgage business near Seattle." That would be a jump of over 50%. Ok it would be less if adjusted for inflation. But still a huge increase. Once again, the long term is being sacrificed for the short term.

  • "The traditional 30-year mortgage with guaranteed payments is increasingly a loan of the past." Sad. Very sad.
  • "This year's fashionable model, known as an "option ARM," allows borrowers to make payments with monthly rates starting as low as 1.25 percent for the first five years of the loan; the average rate on a 30-year, fixed-rate loan is about 5.6 percent." Avoid this loan like the plague. Entirely reckless. Flippers (speculators) love these loans as they increase their leverage (buying ability). Some flippers have made a boatload of money flipping properties. It is sickening to watch. What useful product or service are these flippers creating? Irresponsibly shifting wealth from the future to the present. Thats real useful.
  • "Borrowers whose incomes have not risen enough or who have not planned for the higher payments could find themselves shocked." Right.
  • "The apparent froth in housing markets may have spilled over into mortgage markets," Alan Greenspan, the Federal Reserve chairman, said while testifying to Congress last week. "The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages, are developments of particular concern." You are partly responsible Mr. Greenprint aka Mr. Bubbles. You actually recommended people take adjustable rate mortgages out last year. Wake up and smell the coffee. You should resign now and save what dignity you still have.
  • "The lure of such loans is obvious. Because of the lower initial payments, buyers can purchase bigger and more expensive houses." Right on.
  • "One possible warning sign is that a growing share of those taking out the aggressive loans is made up of lower-income families living in expensive areas, according to, a research company. " The good folks at are generally right on the money.
  • "In the first quarter of 2005, 70 percent of option ARM borrowers made the minimum payment, according to UBS." Very troubling. But not unexpected. Screw the future, the short term is what matters. :-(
  • "Nationwide, the increase in monthly payments as more mortgage rates start to float will cost families about an extra $40 billion over the next two years, according to estimates by Credit Suisse First Boston. That is the rough equivalent of a 40-cent increase in gas prices over the same span, which would pinch incomes but would not be likely to create a recession. " Interesting. I still believe a recession is on the way soon (within the next 10 months).
Great article in the NYTimes. The NYTimes deserves major credit for digging into the details of the housing bubble. They should have started earlier. But now they are really working hard in digging to the bottom of this pit.


  1. misspelling in title ... should be "phenomenal" not "...ol"

  2. I can't belive that housing values will continue to rise at the recent pace. The rapid and persistant rise in real estate prices is troubling.

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  3. You are partly responsible Greenprint aka Bubbles. You actually recommended people take adjustable rate mortgages out last year. Wake up and smell the coffee..