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As the mortgage crisis has unfolded, everyone has blamed the new-fangled mortgages: Interest-only, pick-a-payment, subprime ARMs, Alt-As became pejoratives overnight.
In the midst of it all you didn’t hear people talking much about the traditional model. The possibility that interest rates might go down soon and allow adjustable-rate mortgage holders to pay less for a while was tempting. The fixed format is still viewed as uncool, as paternalistic as, say, an old AT&T phone looks next to an iPhone.
New homebuyers who don’t take the fixed option seriously are playing fast and loose. Even if a recession is around the corner, there are more good long-term reasons than usual to “fix” yourself. A wider mortgage crisis is still possible, and such a crisis will probably lead Washington to demonstrate paternalism on a scale that most of the iPhone crowd has never known.
Consider the emotional forces at work here. Americans have become accustomed to counting on continuous real appreciation in home values.
In the last recession, houses seemed almost business-cycle-proof. Lately, consumers have developed the conviction that inflation and interest rates will always stay low. Increasing house values and low interest rates both make taking out an adjustable-rate mortgage a no-brainer.
Nothing But Sunshine
The hundreds of millions in marketing dollars spent by Fannie Mae and Freddie Mac, along with every mortgage broker, have had their effect. From California to Nevada to Florida, states with the highest foreclosure rates in September, consumers now believe that the American dream is an American entitlement. There is something Reaganite too about the whole attitude. When you sign on to an ARM, you are saying that the future is sunlit.
But the future may not be sunlit. Today we can’t expect perpetual increases in housing values or permanently low interest rates. When rates rise, homeowners, especially lower earners, will find ARMs prohibitive.
