The housing bubble as it played out became as predictable as an American TV sitcom. OK, now's when Girl #1 sees Jack on a date with Girl #2 right when Janet and Chrissy walk in to the restaurant too, you know the drill
But in February 2004, right before he would go on a record stretch of raising interest rates (and he knew he was going to do that), Alan Greenspan showed up in front of Congress and basically recommended Americans move into adjustable rate loans, and away from 30-year fixed.
Why, HP'ers, would he do that? Is he seriously corrupt? Was he paid a bribe by the mortgage industry, the bankers, the hedge funds? Did he want to screw the American homeowner? Did he want refi activity to generate housing ATM loot? What was he thinking?
Here's one writer who nailed it, dead on, at the time. Too bad people trusted Greenspan more than they trusted others though, as ARMs and evil products like negative am, no doc, no down took off after this...
Don't follow Alan Greenspan's advice! The Federal Reserve chairman isn't supposed to forecast interest rates, but there he was last week, warning home buyers against fixed-rate mortgages and promoting adjustable-rate mortgages to achieve financial "flexibility." Instead, it's likely he's luring many households into financial disaster.
Greenspan can't promise that interest rates will remain at present, historically low levels, because the Fed chairman can't control long-term rates. And the Fed chairman is not supposed to be forecasting future interest rates anyway. So why would he lead homeowners into a trap that could cost them plenty of money if long-term interest rates rise in the coming years?
What if Mr. Greenspan is wrong again? What if interest rates rise? Home values will fall. And the burden of adjustable-rate mortgages will be huge.
September 09, 2006
One thing, only one thing, never made sense to me about this whole housing bubble thing.. Greenspan's 2004 call to ARMs
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Alan Greenspan is little more than Milton Friedman's Fed mouthpiece, a frontman for market fundamentalism and banana republicanism.
" Alan Greenspan showed up in front of Congress and basically recommended Americans move into adjustable rate loans, and away from 30-year fixed."
this is the biggest misunderstanding of greenspan by the bubblesphere. he did not that. he was talking about the past. anybody who knows what interest rates were like during the period he was describing knows they were in a secular downturn. he was talking when rates were at historic lows. everyone knew they were going up soon. only a few months later he said anyone who hadn't hedged rates going up was desireous of losing money.
he did not say get an ARM.
John Law, you are incorrect.
Here's Greenspan's verbatim testimony from February 2004. You decide
http://tinyurl.com/rdaub
Mitigating Homeowner Payment Shocks
Rising debt service ratios are a concern if they reflect household financial stress and presage a drop in consumption or a rise in losses by lenders. Most homeowners and renters are aware of the possible difficulties should they lock themselves into a high level of debt payment obligations. Financial institutions might be able to help some households in this regard by looking for ways that households--both renters and homeowners--can shield themselves from unexpected payment shocks.
One way homeowners attempt to manage their payment risk is to use fixed-rate mortgages, which typically allow homeowners to prepay their debt when interest rates fall but do not involve an increase in payments when interest rates rise. Homeowners pay a lot of money for the right to refinance and for the insurance against increasing mortgage payments. Calculations by market analysts of the "option adjusted spread" on mortgages suggest that the cost of these benefits conferred by fixed-rate mortgages can range from 0.5 percent to 1.2 percent, raising homeowners' annual after-tax mortgage payments by several thousand dollars. Indeed, 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.
"the traditional fixed-rate mortgage may be an expensive method of financing a home"
'nuff said, dude was recommending getting into arms
John - I think this has been discussed in this blog before. I can't find original quotes but here are some other sources if you choose not to believe Keith on this one. I remember seeing the Greenspan blurb on TV when he said it and my husband and I just looked at each other in horror.
http://www.washingtonmonthly.com/archives/individual/2006_08/009281.php
http://moneycentral.msn.com/content/P73977.asp
http://biz.yahoo.com/pfg/e03greenspan/
"Indeed, 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."
there it is, that's my point. he was talking about the past.
talking about the past with a big recommendation on what to do in the future
open your eyes
I heard it said that Greenspan was an over-rated hack. I know so many like this in the Fed Gov, who radiate confidence, and others just buy it-- like a 'Wizard of Oz' effect.
His wife, Andrea Mitchell, has never impressed me with her political analyses, but people like Chris Matthews treat her as a Delphic Oracle, and I think her husband's position of power and the sychophantism of the press may have given her undeserved cred. Greenspan's tacitern nature may have been mistaken for depth. Like the psychological factors in a bubble, people's reputations can snowball beyond justification. There's a quote about attributing to malice which is nothing more than ineptitude, and I sense this is Greenspan's story more than anything.
"'nuff said, dude was recommending getting into arms"
he said "may be" and then talked about how much risk of rising rates you want to take. people in Europe, if I"m not mistaken, use mainly ARMs for home purchases. you could have gotten an ARM in 2004 and done alright. IF you had budgeted rates that were much higher and bought a house you could afford. the problem is people don't know what kind of loan they had, they bought too much house and couldn't afford the payment shock. notice the word shock, as in unplanned.
how many people do you think got an ARM and budgeted higher rates or contemplated higher rates? probably zero. they ignored rates because they were certain they could handle them. they gambled on being able to refi at a low rate and with lots more equity. rising prices were going to bail them out.
case in point, are interest-only mortgages the devil? no, SOME people can handle them. but that was 2000 when there were like 1-2% and for the "wealthy". today, they are not the devil, but they are for those who should have been nowhere near them.
The Fed's job is:
To protect the dollar.
To fight inflation.
Greenspan morphed his job. He will go doen in history as a criminal.
Prior to the S&L crisis, a consultant wrote the comptroller of the currency to tell him that his fears were unfounded(he addressed congress about the s&l's).
The S&L crisis spawned the RTC and we had one of the worst deflationary periods since the great depression.
The consultant was Alan Greenspan.
He is an idiot, has created more inflation than anyone in history,and is the most fiscally irresponsible Fed Chief in history.
"Indeed, 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. "
Remember he said this in the middle of the biggest RE bubble in history and RIGHT BEFORE he started raising rates "sharply upward"....
In the middle of a housing mania why would the old geezer infer that it may be better to get into ARMs? Why RIGHT THEN?
Especially when everyone thought interest rates would stay low forever and housing prices would continue to rise forever.
People would see "saved tens of thousands of dollars had they had adjustable-rate mortgages" and that is what sticks in their mind....mission accomplished.
Sneaky, dishonest, and criminal.
The elite bait the suckers and then reel them in. Their philosophy...."the masses are asses".
Sorry JLii...you get the "ostrich award" for being both wrong as well as naive.
"Sorry JLii...you get the "ostrich award" for being both wrong as well as naive."
nope, I understand the conspiracy theories. he said to the degree that people PLAN. you can plan for higher rates with an ARM. they do it in europe. that's the thing, people didn't plan. they lived in the now(and the lower payment).
can you get an ARM at 3% and withstand rates at 7%? of course. IF YOU PLAN. the problem is people couldn't afford a fixed(or didn't want one) and went for the ARM. they didn't know what they were getting into. how many times did we read that people thought that their 2% cap meant their payment could only go up 2%, not their interest rate.
you people just isolate one piece and don't look at the whole.
Remember Ken Lay touting ENRON stock to employees and share holders as a good strong investment?
Meanwhile selling his as fast as possible!
Under normal market (no bubble), I think an ARM may have some attractiveness. For example, if you're qualified to purchase a $100k house @8% fixed for 30 years, you can instead opt for a 5% ARM fixed for 3 years. The difference is your savings. Now, as soon as the rates starts to move up near the 8% mark, you may want to refi. Of course there will be some cost associated with it, but the idea being presented here is that you have conservatively estimated your ability to pay your mortgage at a higher rate and turn around and avail of a much lower rate, if it will allow you to save including any associated cost of refi.
The problem was when the prices were inflated, the sceanrio presented above will not work. For one, even with an ARM, they can barely afford to buy, how much more when the rates adjust? On the other hand, they thought it was a smart idea to turn around and sell it for a profit when the time comes. Unfortunately their so-called exit strategy was doomed to fail, because they failed to realize that this time the new buyer, with the same income level as theirs, could no longer afford under the current rate. Therefore they're stuck and can't sell their house without taking a loss or if they owe more than the market value of their house (post bubble), then you have foreclosure.
Hey Keith....check out this website for Richmond american homes in Phoenix....it just keeps getting better.....
http://www.richmondamericanhomes.com/specials/phoenix/PH090605_6Months_NoPayments.html
Maybe Keith, Greenspan wanted change too. Maybe he was secretly driving the train off the cliff in order to force change (and then he shrewdly jumped off the train just before he knew it would crash -- Not to mention picking a successor train conductor that he knew would pour on the gas).
Maybe the old 'gold standard' Greenspan never died at all...
Senate hearings (1995):
Senator Paul Sarbanes: “Now my next question is, is it your intention that the report of this hearing should be that Greenspan recommends 'a return to the gold standard?'”
Alan Greenspan: “I’ve been recommending that for years, there’s nothing new about that…. It would probably mean there is only one vote in the Federal Open Market Committee for that, but it is mine.”
Alan Greenspan (May 1999):
"Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted."
http://www.lewrockwell.com/bonner/bonner188.html ->
"I remember it so clearly. I was sitting in a House committee hearing room. My tormentors kept asking questions. I kept giving the kind of answers for which I later became famous…answers that didn’t say anything. And I thought to myself: if these lardheads want easy money, I’ll give them easy money. I’ll give them the easiest money the planet has ever seen! I’ll give it to them good and hard! And so, I did."
John Law is an appologist for the massively corrupt and incopetent Greenspan!
Look at the timing of Greenspan's remarks about ARMS--February 2004.
Greenspan became Bush's lapdog at the end of his "reign." IMHO, Greenspan made these statements because he was trying to do everything possible to get the economy out of the doldrums in time for the November 2004 election so that the Neocons could win....
"John Law is an appologist for the massively corrupt and incopetent Greenspan!"
not in the least. there are plenty of things to criticize greenspan for, misinterpreted comments is not one of them.
I got an ARM in 1987. Very low rate, don't remember exact details. The rate popped up too high in 1989 and I switched to another ARM (11th District Cost of Funds + 2.25%).
If you look at http://www.fhlbsf.com/cofi/history/monthly/monthlyhistory.asp you can see that I did very well.
Got nervous this summer and switched again to a 15-year fixed at 6.375%. Could have done better earlier and later, but on a $145K loan, why quibble.
So, for me, an ARM was very good from 1989 thru 2006. That is 17 years of saving money. Alan Greenspan was right.
Maybe Alan Greenspan is John Galt?
I still think Greenspan's exit from the Fed was ironically Timely!
He knew what was comming down the pike!
'Timing is Everything!'
Here is the answer Keith. Greenspan wasn't as dumb or evil as you thought:
"Greenspan can't promise that interest rates will remain at present, historically low levels, because the Fed chairman can't control long-term rates."
This is a flat out incorrect assumption. The FED CAN and HAS been holding down the long bond rates through monetization. They even inferred publicly they would do as such if needed. Greenspan told em all to go into arms because he knows is a worse case scenario he would bail them out (like Bernanke is doing right now)
"So why would he lead homeowners into a trap that could cost them plenty of money if long-term interest rates rise in the coming years?"
Long term rate won't rise and he knew that. He was the one buying them. Long term rates are still negative when taking into account REAL inflation. My pay has gone up faster than long rates in the past year.
so there
But rates did rise, doesn't matter how 'bad' the ARMs problem is, the key matter it will bother the declining housing market, even if the "worst case" possiblity doesn't happen.
Why, anon, you miss this, just shows your ignorence.
The only reason "interest rates" are falling now is because recession is near.
Alan Greenspan is probably right that the average ARM rate would have saved people money. However, he didn't figure out if people could adapt to the high and low points.
In the real world, mathematical models aren't necessarily useful because a lot of social engineering would be required to get people to do the required financial planning.
If that case, then the average family might just rent and use public transportation.
Heeee, Hawww!
"However, he didn't figure out if people could adapt to the high and low points."
I just noticed that Mr. Greenspan addressed this point directly! That folks would have to manage interest rate risk. Thus, Americans would have to start saving to ensure adequate cash flow.
Typically, I buy everything with cash and, therefore, I pay no interest.
The Fed's job is NOT to protect the dollar.
In fact, by law the setting of policy on foreign exchange is the Secretary of the Treasury's job.
Only if the dollar plummeted so much that there were clear inflationary consequences visible in data could the Fed do anything about it.
The Fed's mandate is "price stability".
I think the mandate should also include underwriting and lending standards when they turn into asset bubbles.
For instance: the right way to pop the tech bubble was not by higher interest rates, but to quickly raise the margin requirements on stocks.
And the right way to pop the housing bubble was to greatly increase the bank reserves necessary at the Fed for holders (banks) of toxic mortgages. That would quickly stop stupid lending, and cut off the air supply of the flippers.
When people like flippers have such a short-term viewpoint, raising interst rates by 1% makes NO difference to them. What matters is when the mortgage brokers say, "Shit on a stick, the central office has cut off our fucking money! Sorry."
"...recent research within the Federal Reserve suggests that many hoemowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade..."
It is clear to me that he was referring to the "past," and impliedly made an assumption that had it stayed that way.
However, he qualified his statement by saying; "...though this would not have been the case,of course, had the interest rate trended sharply upward." Here, he clearly qualified his statement that if it is otherwise (interest rate moving up), then savings under ARM will not work.
Given what he said, it is not a recommedation. Instead, he is giving the public both scenarios.
The last paragraph merely suggests that if lenders can offer "alternatives" to traditional fixed-rate mortgage and as long as the consumers are willing to manage their risks, maybe fixed-rate mortgages are expensive method of financing.
Again here, he was making a comparison without regard to a particular homeowners ability to pay. I don't think he needs to know the homeowners personal income and based his statements from that?
In conclusion, a smart homeowner should still weigh-in what suits them based on their financial condition, and using Greenspan's analogy a just a guide. It is also interesting that Greenspan opinion about ARM will work if there was no bubble. In fact David Barnes said it well when he was able to save for years before refi to fixed rate.
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