It’s déjà vu all over again.
That’s all I could think when I read the Bloomberg story “Americans Gambling on Rates With Most ARMs Since 2008” earlier this week.
The gist of the piece?
Thanks to the same reckless Federal Reserve policies that inflated the first housing bubble, the recent surge in fixed-mortgage rates and egged on by a financial industry willing to sell people all kinds of financial poison to pad its profits, Americans are once again taking out adjustable-rate mortgages, or ARMs, in droves.
ARM applications just surged to 16 percent of all mortgage applications. The last time we saw ARMs grabbing so much market share? Uh-oh: June 2008.
|Adjustable-rate mortgages can set you up for a disastrous fall.|
You remember then, don’t you?
That was just a few months before Lehman Brothers tumbled into bankruptcy, when Washington Mutual, with $307 billion in assets, suffered the largest bank failure in U.S. history, when AIG required a massive $182 billion bailout, and when Treasury Secretary Henry Paulson went begging on bended knee to Congress for $700 billion in TARP money from taxpayers.
A wonderful time to take on an excessive amount of financial risk, no?
Naturally, there hasn’t been a peep about this unnerving trend from the folks at the Federal Reserve. No one at the major banks is publicly and aggressively warning about the risks that ARMs pose to mortgage borrowers.
Chairman Ben Bernanke is apparently pleased that home prices are soaring at rates of 20 percent, 25 percent or more in former hotbeds of speculation like Las Vegas and Phoenix, even as wage and job growth lag far behind. That’s a key factor forcing home buyers to increasingly turn to ARMs.
Or how about the report from RealtyTrac a few days ago chronicling 136,184 house “flips” — multiple sales for a single home in a six-month period — in the first half of this year?
The one that showed a 19 percent year-over-year surge in flipping, and a whopping 74 percent surge from early 2011?
Or how about the huge new bout of heated real-estate speculation I’ve been chronicling for months, and as recently as last week?
Apparently, this is all simply smashing news to Ben and the rest of his Fed buddies. After all, the central bank has kept official rates at close to zero for years now, which makes people think record-low rates are the norm.
Me? I’m going to be as clear as I can. Please do not make these kinds of risky moves with your hard-earned money! In a rising interest-rate environment — the kind like we have now — ARMs can set you up for a disastrous fall.
Sure, you get a lower mortgage rate and monthly payment than you’d get with a 30-year fixed-rate loan. But then your rate resets based on prevailing market rates. In a worst-case scenario, your rate could surge by 4 or 5 percentage points, in some cases doubling your monthly costs.
What if you’re looking to dive into the real-estate speculation business again? Into house flipping with reckless abandon?
All I can say is, don’t fall for the Fed’s bait. We’re already seeing home builders getting hammered. Investors are dumping shares of Pulte, Lennar and Toll Brothers because they know what’s coming.
After all, we’ve seen this movie before. We know how it ends. And, most importantly, we know we’re getting closer to another crisis now that interest rates are surging — exactly as I predicted they would.
Until next time,