Remember all the concerns expressed about the great ARM reset bulge of 2008, when the introductory, low-rate periods of millions of adjustable-rate mortgages were supposed to expire and send countless more American homeowners into foreclosure?
On Thursday, Bloomberg News columnist John Berry suggested that the reset crisis wouldn't be as bad as once predicted. He gave two reasons: First, the interest rate cuts orchestrated by the Fed are having the desired trickle down effect of putting downward pressure on the interest rates that various ARMs will reset at, and second, contrary to popular belief, most borrowers don't actually have mortgages with absurdly low initial interest rates, so they won't suffer too much damage.
Much of the discussion about the danger of resets has focused on the initial interest rate, or "teaser rate," that ARMs carried. That left the impression it was a very low rate that would adjust up a lot. Most of the initial rates were 8.5 percent or above, and now many are set to adjust hardly at all
Berry based his conclusions on data presented in a recent report from two New York Federal Reserve Bank economists, who studied in depth "a pool of such mortgage-backed securities issued by New Century Financial in June 2006."
I read Berry's column on Thursday and considered noting it here. How the World Works savors contrarian takes. But in my judgment, over the past two years that I've been following his coverage of the Federal Reserve and the economy, Berry has consistently understated the potential harm that might be wreaked by the housing bust and credit crunch. A good example is his January column pooh-poohing the likelihood of a recession this year.
Some analysts were predicting a recession would hit the U.S. economy in the fourth quarter as consumers, hurt by falling house prices and the high cost of gasoline, cut spending.
It didn't happen, and there's no reason to think it's going to this year either.
Anyone who tries to predict which way the economy is headed is going to be wrong at least some of the time, but to say, in January 2008, that "there's no reason to think" that there might be a recession this year seemed to me, at the time, a little overboard on the bullish side of the ledger. So I decided not to call attention to yesterday's Berry column, figuring it just wasn't that interesting that someone who has a track record of optimism about the economy was ladling out some more good cheer.
With this background, readers might therefore understand why I was intrigued to read Naked Capitalism's Yves Smith analyze Berry's column this morning and call it "extraordinarily misleading."
Emphasizing that the data Berry based his conclusions on came from just one month of mortgage-backed securities issued by just one mortgage lender, Smith took the time to look at a database containing information on 38 million mortgages issued between 2004 and 2006. That database shows that out of 8.4 million ARMS originating during that time period, only 9.1 percent had initial interest rates of 8.5 percent or higher. A whopping 1.1 million were 2 percent or lower. (Contrast that to Berry's assertion that "most of the initial rates were 8.5 percent or more.")
Smith has been pretty dead on in warning about how serious Wall Street's credit crunch would turn out to be. And optimism has been in short supply in his corner, of late.
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