Thanks, Alan!

Ever since they were introduced in the early1980’s I have been a big proponent of Adjustable Rate Mortgages. Fed Chairman Alan Greenspan has just come out and said that he agrees with me. Here’s an excerpt from his speech:

“Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade.”

The full text of his speech is on the Internet at

http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/default.htm .

What he said was true in the ‘80’s too, when rates were declining from highs approaching 20 percent. The decline in the ‘90’s might have been a little less obvious, but it was still clear enough for the Fed researchers to find. I saw it too, but early enough to give my clients good advice.

Not everyone believed me of course, but those who were willing to consider ARM’s rode rates all the way down. Those who had chosen fixed rate loans had to keep refinancing. My clients saved millions of dollars compared with that bunch.

The problem is that tens of millions of people jumped into the traditional fixed rate mortgages without giving much thought to the alternatives. This turned out to be an expensive choice, which is why I suppose Chairman Greenspan chose to talk about it. I wish that he had given that speech 10 years ago. I would have felt a little less lonely. More important, maybe a few people would have gotten the word in time to do something about it.

So how does this happen? There are four issues that I see here. We start out with human nature. 99 percent of people describe themselves as “more conservative than average.” That’s silly, of course. Only 50 percent of people are more than average, and the other 50 percent are less than average. I think it’s just that people want to perceive themselves as being CONSERVATIVE. Whether they are right or wrong, make expensive or cheap choices is of secondary importance.

The second issue is that some people think only of the “worst-case” scenario. I think that is important when considering whether or not to buy homeowner’s insurance. You simply should not take the risk of not insuring your home against a catastrophe. But is that a way to plan your financial life? I don’t think so and I’ll bet you don’t either. Is your 401(k) invested 100 percent in ultra-safe, no-risk Treasury Bonds? So you have decided to take a little risk there, right.

The third problem is that many borrowers start out with a preconception that they want a fixed rate mortgage. This might be a poor choice, but as a salesman once told me, “My job is to get the customer what he wants, and if tells me he wants a fixed rate loan, that’s what I'm going to get him.”  End of discussion.

The fourth problem is that the mortgage information delivery system is not unbiased. Most of the time, borrowers are talking with a salesman who is trying to sell whatever he has been trained to sell, whether it fits the customer’s needs or not. The borrower gets all the positive information that shows that product in a favorable light, but none of the negative.

Next week, we can talk about how you can overcome some of these obstacles.

In the meantime, Alan, can we have lunch soon? I have a lot more good, consumer-oriented ideas. You can help me spread the word.

Good luck!