Thursday, December 17, 2009

Helicopter had a “teaser rate” loan

From, the extended Bernanke interview.

Q: Do you have a mortgage?

Bernanke: Oh, yes, we refinanced.

Q: Oh, perfect. When?

Bernanke: About 5%. A couple of months ago.

Q: Good time.

Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.
Q: So, did you get a fixed rate at 5%? I think this might be the most valuable piece of information.

Bernanke: Thirty years fixed rate at a little over 5%.

With short term interest rates at zero, how does an adjustable rate mortgage (ARM) explode?

It explodes when you get a teaser rate. So a few years ago, in the housing bubble, Helicopter Ben likely took out a teaser rate (low rate initially/high rate after teasing period is over) and gambled that since his house would appreciate in value, he could refinance at similar or better terms at that time.

Wrong! Just like subprime would be contained.

He refinanced at a 5% 30 yr, a rate that low because of the Fed’s one trillion dollar purchase of Fannie/Freddie junk paper at a premium.

He didn’t go with another straight forward ARM at 4% and then switch to a 30 yr if 30 yr rates go lower. He clearly thinks that the 30 year is going up. It probably will as the Fed is scheduled to stop buying the junk in March and if the 30 year treasury yield goes up, as supply overwhelms demand.

However, given Helicopter’s track record, is it possible that that his 5% 30 year is actually a high rate and that rates are headed lower still?

Not saying it happens, just asking?

The guy can't even get his own mortgage right. Why do we think that he can manage the world's economy?

HT to Minyanville’s Branden Rife for pointing this out.

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