mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Tuesday, August 07, 2007

Jim Cramer says we're all screwed... or does he?

Last week, Megan McCardle linked to this post lambasting Jim Cramer for saying that 100% of people were going to default on their mortgages.

Now, I think this is a little overboard. But it's important to realize that Cramer wasn't talking about all mortgages - he was specifically talking about "2/28's" - in other words, mortgages that are interest-only for the first two years and then switch to requiring interest plus principle payments. These mortgages are also often ARM's (Adjustable Rate Mortgages, ie the interest rate changes, usually based on the Fed's interest rates) and often have "teaser rates" - very low initial interest rates. Therefore, when they "reset" to requiring principal payments, plus interest payments at a higher rate of interest, they can cause problems.

Keep in mind also that the kind of people who get IO ARM's are probably not in the greatest financial position - they most likely either 1)didn't have enough money to cover interest plus principle payments at the time they got the mortgage (and were hoping their incomes would go up by the time it reset, which may not have happened) or 2)were hoping to sell the property or refinance when it reset - which will be harder since housing prices have stopped going up by 25% a year like they were a few years ago (you know, before MadAnthony bought) and because with subprime lenders (lenders who lend to people will sketchy credit) having trouble there are fewer lenders and remaining lenders are being tighter about who they loan to.

So while I think the 100% rate is high, I don't think that Felix's mention that But the idea that wealthy people will stop paying their mortgages because their houses are "fungible" is relevant, because wealthy people probably didn't take out 2/28's in the first place.

I do wonder how many people there are with 2/28's - I've heard stats that high percentages (50% or more) of borrowers were taking unconventional mortgages (ARMS, IO, ect). However, when I was house-shopping last year, I don't remember seeing anyone offering them = most of the IO/ARM's seemed to be 5/25 or 5/30.

And for the record, MadAnthony has a fixed-rate mortgage... but it's a 40-year.


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