Greenspan in 2004: Adjustable rate mortgages are a great idea

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Greenspan in 2004: Adjustable rate mortgages are a great idea

Monday, December 22nd, 2008 | Misc |

USA Today February 23, 2004 - Greenspan says ARMs might be better deal:

Federal Reserve Chairman Alan Greenspan said Monday that Americans’ preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

While borrowers can refinance fixed-rate mortgages, Greenspan said homeowners were paying as much as 0.5 to 1.2 percentage points for that right and the protection against a potential rate rise, which could increase annual after-tax payments by several thousand dollars.

He said a Fed study suggested many homeowners could have saved tens of thousands of dollars in the last decade if they had ARMs. Those savings would not have been realized, however, had interest rates shot up.

“American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage,” Greenspan said.

I assume Greenspan means mortgage product alternatives like option ARMs that now threaten to wipe out millions of families. History is not going to be kind to Greenspan’s memory when they view his role in the mortgage meltdown.

Previously:

3 Comments to Greenspan in 2004: Adjustable rate mortgages are a great idea

Justin Buist
December 22, 2008

He’s right. If you get a regular ‘ole adjustable loan you’ll save money over fixed provided that you can weather the times when the interest rates are high and interest is high when the economy is moving, traditionally, so it’s not out of the question. Just depends on how you earn your income.

Les Jones
December 22, 2008

The flaw in that plan is that it assumes that the Fed only keeps interest rates low during bad economic times. During the Greenspan-Bernanke era interest rates were kept permanently low in good times and bad, which is how we got into this mess. Well, that and the insane lending practices of banks and mortgage companies.

Justin Buist
December 23, 2008

Perhaps I shouldn’t have commented on just how one would weather a high interest period with an ARM. That kind of muddied the waters.

If you enter into an ARM the risk is on you. The bank need not concern themselves with what future interest rates might be. They’re going to profit no matter what the Federal Reserve does to prime because the interest rate you’re paying is going to be the same as any other loan that they’d be making that very same day.

When you enter into a fixed rate mortgage the risk is on the bank. They must calculate in a safety net in order for them to still make money over the long haul which is why you eventually pay out more in an fixed mortgage than you do in an ARM.

Because they’re carrying the risk they will always tilt the odds into their favor. It’s a very slight tilt, but it’s there, and over the years that money does add up. That’s the extra profit they earn by offering you a fixed rate mortgage, a profit that is earned because they shouldered the risk.

I’m not saying everybody should run out and get an ARM. Hell no. I’m not doing it. However, it does make sense in some circumstances, but the people that fit those circumstances wouldn’t need me to point out what they are. They’d know.