patrick.net

I have a question for the mortgage gurus here.

As Fed continues to cut rate, shouldn't the ARM loans get a break? ARM is mostly based on LIBOR rate, which moves along with Fed rate.

Only those who are interested in fixed rate need to worry about long term rates heading up despite the cuts (but few can afford fixed nowadays). But ARM borrowers should only care about Fed rate, right?

Thanks.

Yes, ARMs and short term loan rates will track the FED rate.
Fixed rate loans will also fall but are more market driven.

Also remember that HELOCs will track with the Fed rate or LIBOR (depending on th specific loan). However, remember also that lower rates will not help FBs all that much. Those facing a reset will still face a significant payment shock.

Doesn't this mean that ARM has now become the self-selective FB's program? Once you get an ARM, you can only stay with an ARM (at the mercy of the Fed), because you won't be able to get a fixed-rate mortgage, the rate of which will reflect the world's lack of appetite for USD denominated fixed income instrument.

So, does that mean Fed will need to drop the rate to the floor for many years to come? It is almost like a self-fulfilling vicious cycle.

I was just now musing on the source of inflation. The traditional source in the US arises from wage inflation. People demand more money, get it, then prices trend up as more dollars are chasing the same amount of goods.
Current inflation is not derived from wages. Globalization has held wages down. The sources are: China wanting more and more for its goods as its own workers are demanding more pay, resource rich countries wanting more and more for their base materials (the most obvious of which are the Oil nations), foreign holders of American debt dumping their dollar reserces, and foreign banks demanding greater premiums on American debt.
Externally driven inlfation is going to be much harder to slay. With specific reguard to housing we will have to see 30 year rates track up as bond prices track up until, as I theorize, a local savings and loan rate finally becomes more attractive to a borrower.
Companies will be forced to do what they do in any inflaitonary periods, despite its source, will have to lay people off. When senior engineers chase stability over dollars you are seeing the bow wave of the labor problem.
Presuming the low savings rate and the need for 30 year fixed rates to make housing affordable as a percentage of net pay, housing will be very sensitive to increased interest rates. This means discounts on the price side.

It is said that recessions either develop character or reveal character. How Americans respons to this one will be revealing.

http://www.bloomberg.com/apps/newspid=20601109&sid=a8BXAv.pLCxM&refer=home

I missed this article when it originally came out - has anyone else got any comments on it - mine was Oh- S### - they're gonna want to tax us some more now!

http://www.bloomberg.com/apps/news?pid=20601109&sid=a8BXAv.pLCxM&refer=home

Sorry, first link didn't work!
Basically it's "Schwarzenegger Discipline Shattered by Subprime Slump" - he's having to borrow money coz his revenues have slumped!

he’s having to borrow money coz his revenues have slumped!

Yep, and I suspect the same for localities elsewhere. When tax revenues rose because of skyrocketing assessments, you'd think the localities would have treated the extra money as a windfall and banked it. Instead, the localities considered the windfall as normal and will consider the lack of a windfall as a "slump." This slump will spawn cries that the "loss" will need to be made up with with borrowing or more taxes.

'This slump will spawn cries that the “loss” will need to be made up with with borrowing or more taxes.'

But no way they would lay off the $100k+ earners who got in during the hiring binge.

@Headset,

And the mentality really IS just that simple. What!? What part of "We're Broke!" don't you understand?

Oh and btw, for all of those that struggled during the post nuclear world we call the tech wreck? I guess we now know how Merrill (among others) were having blow-out quarters when the rest of us were covering margin calls, hitting the street for interviews and hoping our car didn't get towed that day!?

I guess our 401k will now take hit - lucky we don't need it for quite a few years - however, I get a bit pissed when I see that even though we've been making contributions, our balance is actually going down!

I never believed in the whole 401k thing. There are usually not enough options to insulate a portfolio from the decline of the dollar.

I hate to say this but some of the bigger 401K Rollovers I see come from the last people you would ever think. Safeway truck drivers w/750K. Nike guys that never got past middle mgmt. Rank and file dudes that just kinda signed up and forgot about the whole deal and just put in their time.

NIA

Peter P,

My exact problem. I have about 20 options to choose from in my 401k and none of them insulate me from the decline of the dollar or inflation. I have shifted my contribution to minimum to pick up the company match (which gves a 50% buffer on decline) and I will make up the difference under my self managed Roth and other accounts.

Kinda funny when both Social Security AND the private pension system stinks.

@Dinor,

You are completly correct on that. I work at a power plant in Ohio as a "blue collar" worker. My coworkers and I stash lots of cash away in our retirement accounts. I know of people with 30+years of work history with more than 1 million dollars in the 401k/403 accounts. This is going to be a good nest egg to add to the pension we are promised and social security. I have only been there 2 years but managed to maximize my contributions pre tax to my 401k last year and will max out this year.

There is somthing simple about the blue collar worker. We are happy if we just have cold beers on our days off and we will drive the same beatup cars for 20+years. Keeping up with the Jones is just a stupid idea to us.

Schwarzenegger Discipline Shattered... What a joke. His first act was to borrow money to make the payments on the other loans. We never got out of the so-called financial crisis. He has been nothing but borrow and spend. He pushed a huge amount of bond debt. He never once exhibited restraint.

thenuttyneutron,

Well there's absolutely nothing inaccurate about what Peter or Duke are sharing. Fact is, most 401K's suck. Plain and simple. Most of the tech crowd get a little touchy when you say they have "options" (when they really don't). To stand here and say inflation and devaluation of the yankee dollar *aren't concerns is a little silly.

My question is... what will be the concern in '09? In '12 etc. There are always issues confronting our economy and... in ways the only "easy" day was yesterday. Here's what's worse (and someone may have sounded the alert prior) but the latest scuttlebutt is they are jockeying to roll out (and I kid you not) "Boomer Death Bonds". Will this suck or what? Unlike the old viaticals these will of course (in typical WS fashion) be "pooled" or "structured". Sound familiar? The big selling point I understand is that they have low/no cor. to equity markets! Yea!

What do want to bet in spite of the fact most people have investment "options" you can count on one hand in their 401K, THIS schlock will become a "default" option? I'm just glad it's Friday.

My exact problem. I have about 20 options to choose from in my 401k and none of them insulate me from the decline of the dollar or inflation.

My wife used to contribute most to foreign stocks. But the emerging markets are looking too crazy recently. It would be nice to have some FX funds. :(

Rank and file dudes that just kinda signed up and forgot about the whole deal and just put in their time.

Enough said.

Keeping up with the Jones is just a stupid idea to us.

Of course that is stupid. Vastly exceeding the Jones should be the goal.

African Americans were more likely to die than the average

Everybody has the same likelihood of dying eventually.

Citi is having an emergency board meeting over the weekend.
http://biz.yahoo.com/rb/071102/citigroup_boardmeeting.html
I wonder what that's all about? I wonder if Mish is right.

Does Citi have a lot of MBS exposure - or is it the realization that people are putting everything on their credit cards to try and make their mortgage payments - now they are walking away from the houses - so next stop - walk away from your credit card debt?

DennisN,
Looks like Citi CEO Chuck Prince is planning to resign. I'm sure that has something to do with it. As far as Wall Street firms go, it's 2 down so far (Prince presumably, and Stan O'Neal). Cayne at Bear Stearns is toast, especially when the WSJ is continuing to trash him - playing bridge and smoking pot while Rome burns. All the talking heads are bandying about the phrase, "cockroach phenomenon." As in, when you turn on the lights and see a roach (Merrill, Citi), you know there are a LOT more around.

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