How the Banks Are Making Things Worse: Trying to Lock an Adjustable-Rate Mortgage

When we bought our current home, back in August 2001, we had a long discussion first. The place seemed perfect for us, but how badly did we want it and how long were we likely to stay? Because surely we had to be buying at the very top of the market; could we hang on through the 25% drop in real estate values that was bound to be coming in 2002?

To our astonishment and alarm, for the next five years or so house prices continued to climb, and the value of our (already-overpriced) house doubled. If you looked at family incomes in the area, if you looked at average rents, if you looked at any sensible indicator of value whatsoever, the assessed value of our house by 2005 was insane and unsustainable.

The value of our house has since tumbled about 30% in value and everyone in this city is whining about how ‘undervalued’ real estate now is. It’s still up probably 45% from the overpriced values when we bought it, and I’d guess it’s going to tumble at least another 20% before it stabilizes. Everybody is crying out that we need to get the economy back to ‘normal,’ and by ‘normal’ they seem to mean 2005. Well, sorry. Stocks need to have some relationship to corporate earnings, and house prices need to have some relationship to the income people have to pay their mortgages, and those factors have been wildly out of line with reality since about 1998.

This is on my mind because a real estate appraiser is coming by this afternoon to look at our house. Despite the credit squeeze, we’re refinancing.

Why refi? Because in addition to our basic fixed-rate mortgage, we have a rather modest second mortgage (actually a home-equity loan) on an adjustable rate. Adjustable rates have always made me nervous, but our banker pointed out that at any time we worried that rates were headed up, we could ‘lock’ the balance at a fixed rate for probably 0.5-0.75 above the current adjustable rate.

Our adjustable rate is now down at 4.25%, which is about as good as it gets, so we called the bank and asked them to lock it, expecting to be quoted a fixed rate of 4.75-5.00%.

The rate we were quoted to lock it was 9.60%. The bankers themselves were shocked by the number, and at a loss to explain it.

Can you believe it? In the middle of a foreclosure crisis, brought about in part by rising rates on adjustable-rate mortgages, when the US prime rate is orbiting zero percent, these bastards are charging almost ten percent annual interest to convert a loan to a fixed basis?

Now, this isn’t a crisis for us. We have the option of simply refinancing the whole mess, rolling our second into our first and taking on the total at a fixed rate of 5.3%--which is lower than the rate on our first mortgage, and will lower our total monthly payments. So it’s a no-brainer for us.

But not everybody is in a position to do what we’re doing. There must be thousands—maybe millions—of people out there who are trying to convert adjustable-rate mortgages to fixed-rate mortgages, and are being told that this will double their interest rate, sending it to murderous levels. Talk about predatory lending. The people most likely to be driven into default when interest rates head up again are those who are being screwed right now when they attempt to take judicious action. This is the last thing our economy needs.

Or, as Nobel-laureate economist Paul Krugman wrote in a recent article:

…[A] Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers, President Obama’s top economic adviser, “think governments make poor bank managers” — as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.

Nationalize the bastards. Government isn’t good at running businesses? True. But they couldn’t possibly do any worse. Mattel’s Totally Hair Barbie™ couldn’t do any worse than these clowns.