Tuesday, April 1, 2008

ARM Resets

As you likely know, the housing crisis is based on sleezy loans made to, often, unqualified borrowers and speculators. There have been charts floating around showing the huge mountain of adjustable rate mortgage (ARM) resets that are occurring, and will occur. Correspondingly, there is a whole lot of fear amongst lenders, investors and recent borrowers that they'll get caught with huge payment increases.

Except ....

Mish, in this post, makes the point that the future likelihood is that resets and mortgage payments will go down. I won't go into the details (you can read his post), but the key point is that the FED, through pumping money into the banking system and lower short term interest rates is finally impacting the benchmark upon which mortgage rates are based. Thus, mortgage interest rates are dropping at the same time that housing prices having been taking a huge haircut. And if the stock market begins to stabilize (and I think it will), long term interest rates will likely fall more. Thus, future ARM resets may actually be lower, not higher.

So why isn't this a good thing? In the short term it is a good thing that will rescue the housing market. With an unlimited money printing press and with the swish of a hand, the FED has likely been able to ease the pain. But. There will be cost in terms of the potential to ignite another bubble. I don't know about you, but I'm noticing a lot of stories in the news about speculators picking up foreclosures. But the larger risk is inflation. By cheapening the dollar with such low interest rates, commodity prices (although correcting in the short term) will inevitably rise. In essence, inflation will be the tax we all pay to get out of the last mess, and the bubblicious tendency of the FED will set the stage for the next mess.

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