Can anybody think of any reason why "teaser rate mortgages" where the borrower pays an extremely low interest rate for the first two to five years shouldn't be banned? Aren't these just ways to lure people who aren't good with Excel in over their heads into debt? Isn't home buying too massively serious for the kind of marketing gimmicks that are fine with cheaper products?
By the way, doesn't Obama's mortgage bailout plan feature five year teaser rates?
By the way, doesn't Obama's mortgage bailout plan feature five year teaser rates?
My published articles are archived at iSteve.com -- Steve Sailer
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Essentially, three year or five year ARMs would probably, at some points in time, qualify as "teaser" rates. ARMs can be very useful if someone pretty much knows that they'll be out of that particular house in 5 years.
I think the below-market 1 year or 2 year teasers might have been a problem, but not the longer term ARMs.
What I'd actually like to see, however, is for the lenders to be held responsible if they loan money to some deadbeat, teaser rates or not. Then the whole problem would just go away. To all those that bought mortgage backed securities, they'd lose their money. Then they wouldn't buy MBSes unless they were convinced of their quality.
It makes sense to get a teaser rate if you don't plan on paying the mortgage at all in a couple of years.
Wow!
Next you'll be arguing that crack-dealers shouldn't be allowed to set up their stands right outside high schools and welfare offices!
Your libertarian friends must be shocked and horrified...
Wouldn't taking advantage of a teaser rate make sense if you had realistic expectations of trading up before the low rates expired?
I seriously know of no good reason.
The best I can come up with is in the early stages of a secular increase in housing prices it allows young people to buy more house than they otherwise could afford. Of course, the obvious retort is can you really get a secular increase in housing costs without first having easy financing? I suppose there are a few scenarios where you can, but I think that is just a chance we should have to take. The costs otherwise are too great.
In engineering we have failure analysis where one multiples the *chance* of something bad happening by the *consequence* of that something bad to get a risk assessment. Teaser loans make for a nice example. The chance of a housing bubble from loosing lending is pretty high. The fallout of a housing bubble likewise is pretty high. Ergo, any loose lending that may contribute to a housing bubble should be categorically prohibited, even if it costs a few young up-and-comers waiting a few years longer for their "dream" home.
conventional wisdom 2007 - wall street wizards keep loan rates low.
conventional wisdom 2009 - wall street alone caused the mortgage bubble.
conventional wisdom 2010 - it was foolish for anyone to ever think that the borrowers of 2002-2008 would have the same default profile as the borrowers of 1960-2002. mike millken / junk bonds redux.
of course, for the CW of 2010 to become a reality, iSteve will have filtered through to the masses by then...one can only hope...
ARM's were orignially for professionals who were often transferred from city-to-city to get a house "cheap" for 2-3 years before they moved again, OR for people who expected to be making much more money in just a few years (like a new doctor, lawyer, accountant, or financial planner who just hung out his first shingle in the new city). It would allow the young professional to "go ahead" and get that dream home instead of stair-stepping up as he could afford it.
ARMs, as originally concieved years ago, were never meant to allow people to "state" incomes, and were not for the sub-prime-type borrower (how about hat for a euphemism.....the SPTB anyone?).
GMR's sentiments (first comment) are precisely the types of remarks my loan officer friend has made to me about the whole mess.
NOTE on ARM's that all of you who ever get one should know: You will find that if interest rates fall, your mortgage company will FORGET to lower your interest rate, and you will have to call them/harrass them to get them to do so. They NEVER "forget" to raise them when rates go up though...
0% yield on T-bills issued by the trillions rolled over every three months. Now there's a teaser rate
for the borrower, us. Beware the balloon payment, pop goes the weasel.
Fraud, gangsterism and looting
explained.
http://tinyurl.com/ckkcu3
I can't think of any good reason to join a CD club promising the first ten for a penny each, only to jack up the prices later.
Honestly, I'm disappointed. This is just the kind of thinking that leads to government poking into all sorts of private transactions, creating all sorts of unintended consequences, all the while abridging private citizens' rights to enter into mutually beneficial transactions.
Furthermore, the idea you've explored in the last few posts of insulating people from the consequences of other people's decisions is unrealistic. You can't stop your neighbor from selling his house at a low price because he has a need for fast cash. You can't tell him not to sell it to a buyer of a different race in order to protect your property value.
To put it another way, when the guy next to you on the plane misses the flight, you get to keep the extra elbow room, and you don't have to pay him a cent. When he makes the flight and he's a 300-lb blimp, well, you knew you were taking a risk when you booked.
it gives you five years to play mega millions before the payments increase
They were no doubt popular with flippers. I can see a reason to ban them. I'm less sure that it ought to be done. You might as well propose that brokers not work on commission -- that might work just as well. It's difficult to protect idiots from themselves. What needs to be cleaned up is fraud. But I'm not too sure how to do that. And if you can't do that for a teaser mortgage, then how can you do it for any other kind? If such a mortgage is given out, and all the documentation is correct, e.g. regarding the borrower's income (ability to pay, now and in the future), then the risk should be apparent to the issuer, to rating agencies, to any organization buying or 'securitizing' the loan, and to the customers for that paper.
Banned! A private contract between two people? What about a recent college graduate with good grades, starting out witha low salaried job, but with good prospects. He or she can handle the teaser rate for now, and barring disaster, will be in a position to pay the market rate in a few years? You would ban such a deal between these consenting adults?
Steve, what's getting into you? The problem is not this type of deal.
The problem is not any type of teaser deal, as long as the taxpayers, present or future, are not saddled with the loss when such loans are given to people with no prospect of paying the re-adjustd rates. Let the lender beware: let him go belly up if he makes too many of these stupid loans. Or it he turns around and sells the loan, let the buyer beware.
It's not that the free enterprise system (often incorrectly called "capitalism") doesn't work. It's that politicians, and the dopey voters and corrupt influence-peddlers who keep them in office, are killing it.
I think tha one great type of loan to develop would be what I have coined "the 30 year fixed amortized 10 traunch loan". It would be like your standard 30 year fixed loan except it would be divided up into traunches. The borrower would have one payment which would be disbursed evenly to all 10 (or however many). If the borrow did nothing it would function exactly like a regular loan. The difference would be that if the borrower paid off a traunch earlier, or several, it would give them the option to lower their payment instead of simply lowering their principle. This would place both the borrower and the lender at a lower risk of default. During lean times (recession, job loss, etc.) borrowers could simply pay the minimum which would be lower than it would have been thereby giving them better survivability. It would also make paying off the home loan a better option because it would in effect, all other things held constant, be a better investment (looked another way, the same financial deal but with lower risk). It is a great idea. The banks might have some interest rate risk but F#@% them.
I used to get spam e-mail and regular junk mail for teaser rate mortgages all the time. They weren't conventional 3, 5 or 7 year ARM's. They would have the low rate for as little as one or two months.
I see no reason why those shouldn't be banned. Or as an alternative, the lender should be required to hold the paper for 1 or 2 years, thereby assuming the risk of default from deadbeats and fraudsters.
The first commenter is dead on with his last paragraph. In addition, the fundemental problem of the West is that a shrinking productive class is expected to subsidize a growing parasitic class and a growing unproductive class. All the other problems are always going to go back to that. It all goes hand-in-hand, the massive low-IQ immigration, the mafia-like infiltration of the institutions, the corruption of the government. Everyone wins - expect the old, middle class. The results will be higher taxes, higher fees in general, less security, less general trust, more propaganda, more governement, more lies, less places to live in, less travel, more anxiety, etc. It's a good thing we have universities/schools that teach our kids that these are all good things and television to distract us from it all.
Jim O said
It's not that the free enterprise system (often incorrectly called "capitalism") doesn't work. It's that politicians, and the dopey voters and corrupt influence-peddlers who keep them in office, are killing it.
Your solution to this includes:
Let the lender beware: let him go belly up if he makes too many of these stupid loans. Or it he turns around and sells the loan, let the buyer beware.
In other words: if only all people ("politicians, dopey voters, influence-peddlers") were moral and would acquiesce to the survival of the fittest principle, then we could get rid of much/all regulation, and the perfect political system would work just fine.
"True free enterprise has not been tried" is the libertarians' standard trope. It is identical to the communists' trope "Communism was betrayed by the Soviet Union."
Jim, people are not perfectly or even mostly moral (no matter how one conceives of morality). For example, they DO NOT acquiesce to the survival of the fittest principle (why should one agree to die or to be hungry, for any reason?). They DO NOT unreservedly embrace other races or other families. They DO NOT do a lot of things they "should" do, and they DO do a lot of things they "shouldn't" do.
This has been true in every century, in every society, in every polity, under every religion, every philosophy, every ruler, and in every population everywhere.
One begins to suspect that political theories are less important in understanding society than is something traditionally known as HUMAN NATURE.
The reason free enterprise has so many "enemies" is that it, like communism, ignores the way people are.
"Politicians, and the dopey voters and corrupt influence-peddlers who keep them in office" describes the whole of humanity since the dawn of time. My humble recommendation for understanding political problems is to digest that fact.
You give a moral, rational man an inch, and he may or may not take a mile. But when it comes to everyone else... (joke)
The reason the teaser-rate mortgages ran into trouble is that borrowers could qualify based on the initial payments for loans where there was no possibility of them keeping up the payments once the teaser rate ended.
Rather than banning the teaser rate, I'd rather see the banks required to qualify borrowers based on the payments from a fully-indexed loan amount. If the bank's competitive situation is such that they're willing to give up some short-term cash flow to get customers, let them, but make sure that those customers can handle the loan after that rate.
In a soft rental market, property managers will often give rent discounts for a few months (or more often, rebates after 6 months or a year). But they accept the tenant on the ability to pay the full rent, not the discounted rent.
Thanks for your lecture, David. I feel wiser already.
There's actually a really good tax reason for short teaser rates. People can only deduct mortgage interest if it is above their standard deduction. In many cases, people buy a house in the middle of a year, and so the interest for that year isn't worth deducting. Furthermore, people buying a house often have lower income that year (because they just started a job).
Given all that, everybody is better off if the first year has a low interest rate that you make up later.
ARM's were orignially for professionals who were often transferred from city-to-city to get a house "cheap" for 2-3 years before they moved again
They should rent.
Banned! A private contract between two people? What about a recent college graduate with good grades, starting out witha low salaried job, but with good prospects. He or she can handle the teaser rate for now, and barring disaster, will be in a position to pay the market rate in a few years? You would ban such a deal between these consenting adults?
They should rent.
Don't demonize adjustable rate mortgages. I have one. The rate has gone down as well as up, and after 7 years the rate is lower than when it started. I'm sure it will go down again at the next adjustment too.
For what it’s worth, my wife and I used a teaser rate for the first house we bought after getting married in 1994, and it worked out very nicely. The bank gave us 7.25% for the first 5 years (which seemed low at the time), after which we would go to a normal market rate. I thought it was probable that we’d be able to pay off the mortgage fully within 5 years, and we came close—we paid it off after 5 ½ years. The teaser rate saved us a few thousand dollars.
The problem isn’t so much the product as the people consuming it; however, I agree that since we seem to be destined to bail out those who fail, it might make sense to regulate marginal products, such as teaser rates.
The best case for teaser rate mortgages is that when used responsibly, they are essentially short term loans.
Lets say you want to buy a house, but expect to move out in 3 years. A bank could offer you a lower rate on a 3 year loan than a 30 year loan, because the 30 year loan ties up the bank's money for 27 more years and exposes the bank to 27 more years of risk that inflation and surrounding interest rates will increase.
So let's say the bank could offer you 3% on a three year loan that required you to pay back the entire balance at the end of the loan, or 5% on a 30 year loan that required you to pay off the balance over the course of the 30 years.
An ARM is similar -- you get the short term rate for the short term period, but if you don't refinance or sell by the end of the period, you get strongly encouraged to do so by the adjusting rate.
Of course, that's the good story. If it turned out that banks were loaning below cost for the first two years in the hopes of collecting an above market rate on the out years, that would be less defensible.
Still, in housing, that second scenario doesn't make much sense. If the house has increased in value, the borrower will refinance or sell and will never pay the back end rate, and if the house is underwater, the borrower will walk away. If the bank is actually lending below its short term rates on the teaser, it's likely to get stung.
Teasers work on the assumption that after a couple of years inflation plus economic growth will have pushed up incomes about 15% & house prices about 25% so that when the full rate hits the "owner" will be able to pay for it.
A system that works fine right up till it goes wrong.
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