About a year ago Greenspan encouraged individuals to take out Adjustable rate mortgages. Today he had this to say:
The increase in the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages are developments of particular concern. To be sure, these financing vehicles have their appropriate uses. But some households may be employing these instruments to purchase homes that would otherwise be unaffordable, and consequently their use could be adding to pressures in the housing market. Moreover, these contracts may leave some mortgagors vulnerable to adverse events. It is important that lenders fully appreciate the risk that some households may have trouble meeting monthly payments as interest rates and the macroeconomic climate change
Greenspan is a hypocrite on the issue of adjustable rate mortgages (ARMs). Due, to this and other policies he has enacted he should resign or be fired.
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I remember reading this last year and thinking it had to be some sort of joke.
ReplyDeleteAnother example of why drugs and public speaking don't mix.
Alan Greenspan
February 23, 2004:
"Recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.
American homeowners clearly like the certainty of fixed mortgage payments. This preference is in striking contrast to the situation in some other countries, where adjustable-rate mortgages are far more common and where efforts to introduce American-type fixed-rate mortgages generally have not been successful. Fixed-rate mortgages seem unduly expensive to households in other countries. One possible reason is that these mortgages effectively charge homeowners high fees for protection against rising interest rates and for the right to refinance.
American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."
"Due, to this and other policies he has enacted he should resign or be fired."
ReplyDeleteI can see you're so knowledgable about him that you know he's retiring in January.
Taking ARMs is not an automatic death sentence, as you so seem to imply. If you take them as interest rates go down or stay even, you end up saving money. This was in fact true a year ago. Now, surprise, since rates are going up, it's time to _refinance_ and get a fixed rate.
This isn't hypocrisy - it's intelligence.
-DMZ
Came across this comment by dryfly at Calculated Risk. I thought it was interesting.
ReplyDeleteHe quotes a comment made by another:
"I also thought he (Greenspan) was right about the advantage of Adjustable Rate Mortgages in a market with stable to declining interest rates as we have had for more than 2 decades."
Jennifer - I know you are familiar with the concept of 'reversion to trend' or sometimes called 'reversion to mean'? You're too sharp to not be... well AG gets the concept too.
In my view he was an a** for suggesting people take out ARMs when knowing full well he would likely be increasing interest rates and soon and maybe a lot... Anyone else could maybe make that comment without all the blame because they don't have their hands in it... but not AG. It is almost like Lucy holding the football for Charlie Brown... AG telling the public... "Now go ahead and kick it"...
Granted, 10 year treasury rates have stayed low in defiance of the Federal Reserve's interest rate increases. If Greenspan made that statement with the idea of raising rates soon in the back of his head, that's pretty bad.
Retirement can be postponed, though I'd be surprised if he didn't retire in January.
"I can see you're so knowledgable about him that you know he's retiring in January."
ReplyDeleteI knew that. He is actually forced to retire then becaus ehe can't stay as chairman another term. I just think he should go sooner rather then later.
DMZ,
ReplyDelete"Taking ARMs is not an automatic death sentence, as you so seem to imply. If you take them as interest rates go down or stay even, you end up saving money. This was in fact true a year ago. Now, surprise, since rates are going up, it's time to _refinance_ and get a fixed rate. This isn't hypocrisy - it's intelligence."
While I fully agree that "Taking ARMs is not an automatic death sentence," the people taking ARMs are doing it too save money on their immediate monthly payments. They don't think long term. Their thought is 'how do I save on NEXT month's mortgage payment?"
What problem I have is that so many people in this country are so caught up in the here and now, that they are neglectling the future.
This country has become so obsessed with the short run, that the long run has been neglected. We see this in the federal deficit, consumer debt, the housing bubble, and many other aspects of modern american life. It is quite disturbing.
Greenspan explicitly said, "...more-exotic forms of adjustable-rate mortgages are developments of particular concern...these financing vehicles have their appropriate uses. But some households may be employing these instruments to purchase homes that would otherwise be unaffordable, ...".
ReplyDeleteIf you read with care his original statement, which someone posted at the top of this comment series, you will see he is not a hypocrite, and is not recommending that people stretch themselves to the limit with ARMs. He is discussing the fact that in Europe most mortgages have long been adjustable-rate, and pondering why this has not been so in the US, whether consumers might benefit from "greater mortgage product alternatives", and whether it might not be rather cheaper for consumers to "manage their own interest rate risks" than to use fixed-rate mortgages. To someone like Greenspan, using ARMs "to purchase homes that would otherwise be unaffordable" hardly constitutes "managing interest rate risk".
"This country has become so obsessed with the short run, that the long run has been neglected."
ReplyDeletePeople make bad financial decisions. Surprise. This is not a new phenomenon, nor is it ever going to stop. Saying we should stop offering ARMs is like saying we should prohibit investment in the stock market, because the vast majority of people lose money at the end of a bull run.
You are totally ignoring the fact that you can refinance an ARM to be a fixed rate mortgage. If you think the market is going down, you shove money into bonds. The principle is exactly the same here.
I forgot, however, that we all need to be treated like children, and prevented from making bad decisions and mistakes. Excuse me.
You yourself have alluded to "Greenspeak". You mock it, yet Alan Greenspan has the incredible ability to _not_ shock markets with Fed statements. That takes considerable skill.
-DMZ