San Diego Housing Market News and Analysis
Can You Say "Conspiracy" (in the Housing Market)
User Forum Topic
Submitted by powayseller on December 17, 2006 - 7:34am
Excerpts from Sell Now, Chapter 4 (Can You Say "Conspiracy"), by John Talbott
"Probably the worst financial advice ever given to the American public was offered by Alan Greenspan in late 2004. My Greensapn touted adjustable-rate mortgages (ARMs) to the public, saying "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage." The most disturbing part of the advice is that we know Greenspan is smart enough to know better. Not only ws it terrible advice, but Greenspan must have known it was bad advice before he gave it. Greenspan can be accused of many things, but being dumb is not one of them.
At best, Greenspan had ulterior motives beside smiply helping the citizens he was supposed to serve. At worst, he was prt of a grand conspiracy to aid the commercial banks and ignore the potential harm to the American public. If so, whose interests was he actually looking out for? Why would the Federal Reserve chairman do something so harmful to his own citizens? Who dreamed up this conspiracy?...
What bankers particularly liked about the new mortgage instruments [35% of all US mortgages in 2005 were ARMs; neg-AM loans, I/O] was that the new floating-rate or interest-only mortgage payment was lower than a standard self-amortizing thirty-year mortgage and so allowed potential homebuyers to qualify for ever-larger amounts of mortgage money....
The homebuyers also bought into the logic. It made sense not to pay a premium to lock in rates for 30 years if they only planned to livei nt he house for 5 years...
What is so terrible about ARMs that Greenspan knew but didn't tell homebuyers? First of all, long-term 30 year mortgage rates in 2005 were at a forty-year low. They had peaked at 16.5% back in 1981, but by 2005 were around 5.5%. This was an excellent opportunity for a homebuyer to lock in a very low rate for 30 years so that the mortgage payments could never vary in the future. If rates went even lower you could always refinance. It is rare in finance that the public has such a valuble option given to it as the right to refinance if rates decline, but this is typical in 30-year mortgages. By moving to floating rates, the homebuyer surrendered this option.
But the real travesty in people utilizing ARMs during this period is that it shifted all interest rate risk from the banks to the homeowners. Previously, market interest rates moving was a problem for the commercial banks, which were spending large amounts of money to hedge their interest rate exposure. Under ARM financings, the buyers had volunteered to absorb almost all future interest rate risk...home prices immediately increased to offset any benefits resulting from the lower offered intitial rates.
The more disturbing part of the story, and the part that Greenspan definitely knew but didn't tell the American public about, is that ARMS don't even make sense for those homebuyrs hwo are only planng to stay put for 3 or 5 years. The brokers' pitch to them was that they could always sell before the initial ARMS's interest rate was scheduled to rest. What they, and Greenspan, forgot to tell the public was that if house prices had declined in the meantime, getting out of the house investment would be extremely difficult. Because trillions of dollars of ARM mortages had been sold, there are literally tens of millions of households that will be in big grouble if interest rates increase in the near future and housing prices decline [NOTE: this is already happening]...[The ARM homeowner] will be between a rock and a hard place - declining market values for his home and increasing monthly mortgage payments. [So he will be forced to sell into a weak market, when he is underwater, a scenario that Greenspan knew would happen]
And here is the real dilemma. He is not alone. Tens of millions of ARM households may face the same decision - sell into a down parmetk or try to find a way to afford a much largerm ortgage payment. Because so many will face this quandary at the same time, housing prices will grow even softer...So the people who utilized ARM financings in order to stretch to afford their homes are exactly the ones who will suffer the greatest increases in rate. If you didn't qualify to buy a home utilizing a fixed-rate mortgage at 5.5% in 2005, you are not going to be able to afford to keep it when ARMs rest to 7 or 9%.
When then would Alan Greenspan purposely give bad advice to the people he has sworn to protect and serve? No man can serve two masters. For the answer to this question we need to digress for a moment to discover where Greenspan's true loyalties lie.
Each quarter, Greenspan appears before Congress or issues a publicly available press release to comment on how he ses the American economy performing and what he has done to fight inflation, the Fed chariman's primary responsibility. Without exception, every time he has made such a report, he has said, or implied, that he once again has been successful in quelling inflation for another quarter, and how, by keeping wages down.
Whose wages do you think he is talking about? We have seen economic growth and worker productivity increase greatly during his tenure, but almost no real increase in American wages. Greenspan is correct that partof his job is to help control inflation,but it should be limited to controlling the priting of new money which is what drives general inflation. By interfering the in the wage-setting process of the free market for labor, he has become an enormous destructive force for American labor, and it has suffered greatly as a result. ..you must understand who Greenspan really works for.
It is true that the Federal Reserve chairman is appointed by the president, but the 12 regional Federal Reserve banks are controlled by our nation's commercial banks. ..Keeping American wages low, under the guise of fighting inflation, is one of those cases where Greenspan clearly puts the interest of his banknig friends above the American worker. By keeping wagse down, he helps Americna corporations become more profitable, and thus makes the bank's corporate lending portfolio all the more secure and profitable. To Greenspan, it is an unfortunate side effect that the American worker suffers so.
In one terrible piece of advice, Greenspan was able to shift substantial future interest rate risk from his commercial banks and thier balance sheets to American homeowners. He jsut forgot to disclose that he wsn't working on behalf of the American people, he was working to protect his banking cronies and prevent a possible future problem with the American banking system. Of course, the increasing utilization of ARM financings in the housing business has not reduced the risk to the banking system, it has worsened it.
This administration has been corrupted by a system that allows our biggest banks and corporations to "buy off" our elected representatives through campaign contributions and lobbying efforts. This pay for service is rampant throughout the federal government but quite possibly the most damaging example is the way we regulate Fannie Mae and Freddie Mac. [long story about Congress overlooking the tens of billions of dollars of accounting adjustments, corruption of lobbying efforts which make Congress look the other way and the GSE executives enriching themselves at great risk to the public]
[Talbott goes on to say that Fannie Mae met with builders, and the FDIC met with member banks to discuss problems with exotic lending and risks to builders and banks, but nobody warned the public and the minutes of these meetings are still not released.]
Your government is now controlled by the nation's biggest banks and corporations, whic contribute to the election campaigns of elected officals and lobby them daily. The housing crash will provide evidence that people will point to in order to demonstrate with certainty that our government no longer puts your best interests at heart."
END OF EXCERPTS FROM TALBOTT'S BOOK
So basically, Greenspan lowered interest rates to 1%, but did not want Americans to get the benefit of low 30 year rates, because that wouldn't be good for the banks. His plan was brilliant: get people to take out low interest rate loans, borrow against their ever increasing homes, and make sure the banks are not stuck financing it all at those low rates. Transfer the inevitable rising interest rates to the borrower.
Moving from 30 year fixed mortgages funded by Fannie Mae, to adjustable rate mortgages funded by investors in the mortgage backed security market, transferred more risk to China, pension, and hedge funds. It also provided an outlet for excess global liquidity.
~Active forum topics~