Two Sides to Every Coin

No, that's not any coin you want to find.
But it is a crazy marketing idea I had.
Anyone know where I can get custom urinal screens made up?
Me neither - bummer.



In the Chronicle yesterday was an article that mentioned a position by a Merrill Lynch economist, Sheryl King.

In her opinion...

• Keep your Option ARM,
  
• Keep your Regular ARM,
  
• Now is the wrong time to refi into a fixed rate,
  
• Get an Adjustable Rate Mortgage and ride the rates down!

(think Dr. Strangelove...)

No really, I'm not kidding, that's what she said!
And she's got some good points in the article.

"Adjustable-rate mortgages are tied to short-term interest rates, which follow the federal funds rate.

Fixed-rate mortgages follow long-term rates, such as the 10-year Treasury bond. Long-term rates are set by the bond market and don't always follow short-term rates.

After the Fed started raising the federal funds rate in June 2004, homeowners started abandoning adjustable-rate mortgages in droves!"

Hey, exactly how much is a "drove"? (see yesterday's post)

And it's true, if you look at the life of an adjustable rate loan over the last 30 or 40 years they have typically outperformed fixed rate loans originated at the same time. We in the biz know that.

The problem is that most of the real people out there cannot handle the real life of adjustables.

If the payment goes down, they can certainly handle that.
They go out and buy a boat! (or a car, or clothes, or...)

But then the payment goes up (because that's what adjustables do), that person is tied to making those new payments and the increased mortgage payment.
Guess what happens next?


Here's the problem I see...
She's betting the Fed's are going to drop rates.
She's betting the Fed's are going to drop rates "in droves".
She's betting on a lot of things.

And if she's wrong, guess who gets hurt?
Not Sheryl King - she get's paid to have a point of view.

And what about the general economic situation?
What happens if it all goes down the toilet? - (so to speak)

From the article:
"King says if the economy is indeed weaker, borrowers might be earning less or have no job at all, which could preclude refinancing." - (preclude means they won't be able to refi)
and
"Moreover, if the housing market continues to weaken, as Merrill forecasts, their homes could become worth less than what they owe. In that case, they might not be able to roll their refinancing costs into the new loan, which could kill the deal if they couldn't come up with these costs in cash." - (that kind of means they'll be precluded too)

So would you say that's kind of like painting yourself in a corner?
Kind of like juggling chainsaws?
Kind of like playing dodgeball on the freeway?

I'll err on the side of safety - thanks!
Be careful out there.