Letters to the Editor


From Amy…


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.

Amy in California 


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). 


Selected Index Rates for ARMs over an 11-Year Period - This graph shows interest rates from 1996 to 2006, including the one year London Interbank Offered Rate (from 6.2% in 1996 to 5.6% in 2006), the Eleventh District Cost of Funds Index (from 4.8% in 1996 to 4.2% in 2006), and the one year constant maturity treasury securities index (from 5.8% in 1996 to 5.2% in 2006).


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)


Monthly Cost

4.5% = $760

8.5% = $1,153


Yearly Cost

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.     






From Dan…

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 U.S. 




Dan in Phoenix


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)

Before the Greater Omaha Chamber of Commerce, Omaha, Nebraska

February 6, 2007


The Level and Distribution of Economic Well-Being




Perhaps the following data cited by the State Comptroller of New York is an example of why Chairman Bernanke is concerned about the income distribution. 


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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