Your link doesn’t work, but I get your point.

My point is that such a setup is part of the problem, and each time economy and housing market go down the US tax payer will have to pay a few hundred Billion or even a few Trillion Dollars.

How much in mortgages are open on the USA? I remember numbers in the $12 Trillion range. Let 20% of the owners go underwater, and there are so many “too big to fail” triggered that Uncle Sam has to open his pockets widely (e.g. the US government cannot let any of Frannie go bankrupt).

You wrote “Borrowers are required to put up a large (20% say) down payment”.

20% is actually pretty low – don’t try to get a mortgage for a house in Germany when you have only 20% of the price yourself, you won’t get it.

The reasonable average long-term expectation for housing prices is that they are increasing by the inflation rate, and that every few decades you have to pay a larger amount for renovation of the house.

If the basic assumption throughout a country is that housing prices will go up much faster than inflation then you are likely inside a bubble.

Anyone signing up for an ARM today will face upward ARM resets likely every other year due to the Fed’s previous and future debasement of our currency. More and more dollars with no change in what backs them up makes each worth less!

Can you imagine what a $1500-$2000/mo. mortgage PLUS rising local taxes would be in ten years? Twenty?
Think your earnings can keep up with that? No one could afford to remain in homes thus financed!

I can’t think of anything as likely to turn this into a country of renters.

Excellent point. For such households, absorbing an ARM reset to a higher rate may be impossible.

This also points out why so many new mortgages wash out. If you are already straining when you take on the loan, then you need everything to go right for the next few years. If your income falls, you quickly begin to flounder.

Because of ever-increasing local taxes and increasing maintenance as the house and stuff in it aged, it would have been impossible for me to have kept that house without the 30-year fixed rate mortgage. But, because I bought in a good area that STAYED a good area, the house I “bought” for under $22,000 was sold for $177,000 cash.

Out of that sale, I still, after 23 years of payments, owed over $10,000 “payoff”. Needless to say the $10,000 “payoff” would not buy in 1988 what it would have bought back in 1965. While I was a “winner” in “the system”, many of my neighbors, who pulled up roots every five years to buy something “bigger and better” eventually came to grief financially.

What seems most offensive in a day when “every player gets a trophy” in school is finding out that in a capitalistic society there are REAL winners and those who loose. I guess they think that’s OK in Vegas but not in real life? NO! Welcome to reality!

I realize the GOP is working hard to afford deductions for yachts and planes, but will they at least give a tax credit for a shopping cart?

ARMs are fine when interest rates are going down, which is not the usual state of affairs outside of liquidity traps. They are vehicles for suckering people into buying houses they can’t afford and foreclosing on them when the interest balloons, they can’t make their payments, and the value of their property in the meantime has gone up. Sleazebag real estate agents love them. Consumers should avoid them like the plague. See also: interest-only mortgages. What soulless grifter cooked those up?

Genius: why not take a look at the correlation of the housing market to Greenspan’s tightening of interest rates.

Note the FULLY INDEXED one year rate on this chart, starting from 2004:

http://mortgage-x.com/general/historical _rates.asp

Then ask yourself a simple question: WTF happened to the housing market after that?

Now there WERE a host of factors involved in the housing crisis. But one thing that put the hook on rising prices was the rise in ARM rates, which Mr. Greenspan was a cheerleader for.

Let me tell you something: if you START with a 4.00% rate on an ARM, and the Fed tightens to the point where you’re paying 8%, as in this chart, you’re gonna foreclose pal.

There is enough ignorance on the web on this subject to make anti-Semitism look respectable by comparison.

In fact, annuities/pensions are the natural market counter-party to mortgages, which leads me to wonder why Felix thinks fixed-rate mortgages wouldn’t exist without Fannie and Freddie?

And yes, I realize that mortgages have historically been held for much less than 30 years. We refinanced three times in four years, between 2000 to 2004. The high level of refinancing activity was driven by a spiraling housing market and falling interest rates.

Going forward, refinancing will be much less common. Once interest rates rise, homeowners will be reluctant to give up a 30-year below-market loan. Even if they are under water a bit, the locked-in favorable terms will be tough to give up.