What’s the deal with interest rates? I have an adjustable rate mortgage (ARM) that promised to protect me against inflationary pressures. Over the past four years, inflation has been very mild, only in the 2.5 to 3.5 range (about the same as when I acquired my loan) and yet my ARM has risen by 4 percent. I feel like a fool – but at the same time, I can’t help but think there is something fishy going on here.
A few last words (It’s not just oil…)
Monopoly Power in the Financial Services Industry
Something to pay attention to here…
Straight from the FED…
Lenders base ARM rates on a variety of indexes. Among the most common indexes are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR).
Bear in mind that the 1-Year Constant Maturity is heavily influenced by Federal Reserve Board Open Market Committee activity.
What does this mean? If you are unfortunate enough to have been stuck holding an Adjustable Rate Mortgage (unable to refinance due to financial hardship, etc) then you’ve likely watched your mortgage interest payments rise for the past two and a half years. The real travesty in this situation is that while the longer yield bonds have remained quite stable (note the following graph depicting the 10-year US government security, the shorter term yields have risen dramatically…and the ARMs have happily followed.
If your original rate was around 4.5% and it has risen to 8.5% (not at all uncommon), then your payments have likely risen by more than 50%
(Based on 30-yr, $150,000 mortgage)
4.5% = $760
8.5% = $1,153
4.5% = $9,120
8.5% = $13,840
As a percent of Income
4.5% mortgage loan = 19.7% of total income of $46,326
8.5% mortgage loan = 29.9% of total income of $46,326
Median Household Income 2005 = $46,326
Mortgage Status and Selected Monthly Owner Costs: 2000
For what it is worth, the purpose of the ARM was to protect the lender against potential inflation (driving real rates down), not against the antics of the Fed in pressuring short-term rates upward. The truth is that there has been virtually no inflation, aside from the energy sector, which is a case of single-source supply shock. The Fed cannot cope with such a type of inflationary pressure without extensive collateral damage – witness the collapse of the housing market, replete with record levels of foreclosures and stalled construction.
All I ever hear is that the distribution of income and wealth is
growing ever more disparate. Recently, I read that Chairman Bernanke noted that it is a growing problem in the
Here’s a short quote from the Bernanke speech on the Income Distribution.
“That said, we also believe that no one should be allowed to slip too far down the economic ladder, especially for reasons beyond his or her control. Like equality of opportunity, this general principle is grounded in economic practicality as well as our sense of fairness.”
Remarks by Chairman Ben S. Bernanke (Chairman, Federal Reserve Board of Governors)
February 6, 2007
The Level and Distribution of Economic Well-Being
the following data cited by the State Comptroller of
New York State Controller’s Office
December 19, 2006
“Wall Street is expected to pay out $23.9 billion in bonuses in 2006, surpassing last year’s record of $20.5 billion, according to a forecast released today by State Comptroller Alan G. Hevesi.”
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