ARMs for the Rich
The NYT informs us today that, “The Affluent, Too, Couldn’t Resist Adjustable Rates.”
They took out adjustable-rate mortgages at the peak of the housing bubble to buy homes they would otherwise not be able to afford. Or they refinanced existing mortgages to take cash out. And now, two or three years later, the day of reckoning is here.
These are not lower- and middle-income borrowers, but more affluent consumers with annual incomes of $100,000 or more who are increasingly being ensnared in the home mortgage crisis.
People in all income categories “are facing the shock of new payments that can be twice as much as previous ones,” said Susan M. Wachter, professor of business and a real estate specialist at the Wharton School of the University of Pennsylvania.
Nor will falling interest rates help most of these homeowners, as their low initial payments skyrocket and the worth of their homes erodes, said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America.
Today’s ARMs were “designed to fail, so you have to refinance,” Ms. Wachter said. “It shouldn’t be surprising that values go up and down in this kind of situation. And when you most need to refinance you can’t — the crux of the crunch.”
Refinancing requires some equity. Even if homeowners put a substantial amount of money down, many have no equity because their homes are worth less than they owe. In real estate parlance, their mortgages are under water.
The instrument has not yet been devised that can measure how little sympathy I have for people who refinanced their homes to pay for vacations or so that they could live above their already considerable means. If they go under and have to start from scratch, too bad.
These people are just as much speculators as those who buy homes in order to “flip” them when the market goes up. They were willing to take their profits; now they’ll have to accept their losses. That’s the nature of gambling.