Let's Get Ready To Ruuummmble!

The NY Times (oh, man, I hate that rag) has a blog about real estate, which I never read, and can't recommend to you. However, David Porter of the Pacesetter Mortgage Blog (to which status this humble scrawl aspires) shot me an email about a post at the Times that referred to the Ameriquest commercials during the Super Bowl. Since, as I predicted, the funniest commercials this time 'round were NOT for comestibles, and were, in fact, the Ameriquest commercials (and for certain the MasterCard MacGuyver commercial), I was all ears. The link is here, for those of you that would like to read the article and my response.

The "Don't Judge too Quickly" ads were very, very good, I thought. And the MacGuyver ad was priceless. No pun intended. None of the others struck me as being worth the money, though there was a Budweiser ad that was fairly clever (the crowd doing the sign-holding thing). If anyone can explain to me the GoDaddy.com ad where the straps busted on the fairly homely model's tanktop, I'd be appreciative. I think.

But wait - you were a radical resister and you didn't see these ads, did you? You don't watch football on Sunday, or you don't want to support the hype. Fine. The ads are here. Watch them for yourself. Nobody has to know.

Wait - this is a mortgage blog, isn't it? Then let me mention an email I got from one of our clients earlier today. John English (my favorite movie critic and a very good man) wrote to ask (following a very interesting back-and-forth about Munich, the Spielberg film) why his mortgage rate has risen from half a point below the 30-year rate to half a point above it in about 8 months. Happy, is he, you think? No, he's not. I completely understand. I'm not happy, either (my own mortgage goes adjustable in 90 days), and we two have lots of company. Let me take a second to copy here my response to him, since it applies to pretty much everyone that has an adjustable mortgage, especially those that have option-pay ARMs:

Your rate is indexed to prime. The prime rate is available here and here, and it rises every time the Fed raises its interest rate, which is the rate that banks can borrow from the Federal Reserve. My blog has a fairly large amount of analysis of this phenomenon.

Your loan - all option-pay adjustables - decouple your minimum payment from your interest rate. This is a useful feature for those in payment difficulties, which at the time you were, since your investment house had not sold. You took a couple of days to think about this when you signed for the loan, and I know it was not an easy decision to make. I believe you made the right one, given the information you had at the time. You were weighing possible future higher interest rate against lower payments for the immediate-term, and this loan did make it likely that you could hang on until your house sold. That took again some months, as I recall, during which time you benefitted from a lower minimum payment. You still have that payment, of course, though as you correctly point out, your actual interest rate is somewhat higher. The Fed has raised interest rates 14 consecutive times over a 2-year period, an unprecedented rise in interest rates beyond any possible calculation of necessity. It is a thing over which we have no control. You are far from the only client we have that made the same calculation - it was the same one we made, most of the time - and determined that the short-term payoff made the longer-term risk worth it. All our clients with this loan wish (as do we!) that Greenspan had acted differently. Most of them are still pretty sure (as are we) they did the right thing.

Remember: option-pay ARMs do not adjust payment (in the first 5 years) with rising interest rates. The repayment is at a fixed rate, which can be (and right now almost invariably is) below the actual interest rate that your loan uses to calcualte interest due. The mortgage can "neg-am", or principalize your unpaid interest, using the equity in your house as an overdraft protection. Your loan amount can rise. This is not the end of the world, and in some cases it is even a desirable thing. Not always. This is why we ALWAYS say about these loans that they are like chainsaws. They are very powerful tools, and like any power tool, it has the capacity to do very impressive work if used correctly, with skill, on the proper job. Like all power tools, however, it has the capacity to cut your leg off, too. So be sure that it's doing what you want it to do before you sign anything.

John was smart enough to spend an entire afternoon poring over the paperwork to be sure he understood the loan thoroughly. We ran numbers half a dozen times. He then walked out of the closing and took a day to think it over. This was, I think, exactly what he should have done. He used the tool for what it is good at. That the market has turned on him is nothing he could have forseen and, indeed, we've been saying on this blog for months that it shouldn't have happened. Sometimes it does. Everyone does the best he can to make the right decision, then you live with it and go on.

Greenspan is still an idiot. I just couldn't go the whole day without saying that at least once.