oops, guess that poll question range was too wide, not specific enough

[netmouse]

For those who answered (some form of) Yes, a certain loan interest rate seems excessively high, the majority responded that "too high " starts between 5 and 25 %, and I'd like to see a breakdown on that. Please answer this question too!

[Poll #1343223]

Comments

[sorcycat.livejournal.com]

I was hoping for a poll on variable rate loans, because those are what I think are evil. :)

[netmouse.livejournal.com]

well, and consumer credit cards have started to effectively become variable rate loans....

[sethb.livejournal.com]

What makes them evil?

Note that variable doesn't mean arbitrary.

[sorcycat.livejournal.com]

I was speaking with my tongue in my cheek. However, adjustable rate mortgages specifically are a dangerous tool in that they are more difficult to understand and they place the risk on the purchaser rather than on the institution. While they could be used to save money, they have more often been used to help low income borrowers buy more home than they can afford, with the misrepresentation that interest rates would go down. Maybe the misrepresentation wouldn't be an issue if the loan packagers were actually the loan holders in the end, because they could account (in their selection process) for the increase in risk of default that would come when interest rates went up.

[sethb.livejournal.com]

They've been used to oversell mortgages by having low initial ("teaser") rates, and having mortgage eligibility determined by the ability to make those artificially low payments. There have been fixed (but varying) rate mortgages with the same misfeature.

The issue is the misrepresentation, not the misrepresented instrument.

Trying to make the packagers the holders can't work: bank employees would still have incentive to lie to get raises/promotions now, and expect to have new jobs before the defaults hit. And if only rich individuals using their own money could lend, many fewer people could afford to buy.

[sorcycat.livejournal.com]

Good points, but I think there is something to be said that mortgages in general are complicated and ARMs are even more complicated. I think even college educated folks have a hard time understanding the risk. The more complicated something is, the longer it takes for the customer to understand. I don't know what the solution is, because I don't really want to prevent people who are willing to go through the hassle of selecting the loan they want, but things that are more complicated are more subject to misrepresentation.

[grndexter.livejournal.com]

If you don't understand something, you should hire someone who does to either explain it to you or to represent you. Never go into a transaction without knowing how it works.

[sethb.livejournal.com]

Believe me, I know how complicated mortgages are. I've written code to price them.

The risks of ARMs are easily explained: "The rate you pay will be adjusted annually to 2.75% over the Treasury Rate. In the past 40 years, Treasury Rates have ranged from 1% to 15%. Are you feeling lucky?"

[grndexter.livejournal.com]

different ARMs, different rules.

[sethb.livejournal.com]

Sure; I glossed over the facts that the rate might adjust annually, monthly, or every N years (from 2 to 7 that I've seen), possibly with a longer initial period. And the spread varies. And the underlying rate isn't always Treasuries, it might be Libor. But it doesn't really matter; the risk is the same: that the rate (hence payment) will increase.

[nicegeek.livejournal.com]

Presuming you mean ARMs, I'd tweak the statement slightly to say that they've been used by evil (or at least amoral) people to exploit people's ignorance. The ARM itself is just a financial tool; it means that the borrower takes the risk/reward of interest-rate changes instead of the lender, and is (or should be) compensated for that risk by getting a lower rate than a comparable fixed-rate loan.

ARMs make sense in two cases:
1) The borrower plans to pay off the loan before the rate adjusts.
2) The borrower believes that interest rates will fall (or at least stay level), and is effectively making a bet on it.

I have a friend who only borrows with ARMs. But he's very financially savvy, and wealthy enough to pay off the mortgage if he needs to; he only has it so that he can use the money to buy other investments.

The evil came in when unscrupulous lenders sold ARMs to borrowers that clearly weren't appropriate for them. And ended up bringing most of our economy down as a consequence.