Comments on: Alan Greenspan Can’t Escape His Role in the U.S. Housing Bubble http://jutiagroup.com/2009/05/19/alan-greenspan-cant-escape-his-role-in-the-us-housing-bubble/ Market Jitters & Political Critters Sun, 22 Nov 2009 02:27:02 -0500 http://wordpress.org/?v=2.8.6 hourly 1 By: Ara http://jutiagroup.com/2009/05/19/alan-greenspan-cant-escape-his-role-in-the-us-housing-bubble/comment-page-1/#comment-10610 Ara Fri, 22 May 2009 05:24:04 +0000 http://jutiagroup.com/?p=6385#comment-10610 Can you please explain why low short-term interest rates (fed funds rate) acted as a floor for teaser rates? Is it just because these low short-term interest rates are the bank's (or broker's) cost of capital? But the brokers and banks didn't hold the loans on their books. Can't an ARM be structured in any way, i.e. couldn't lenders make the teaser rates 0% if they wanted? I thought the whole point of an ARM was simply to defer payments (and I guess accumulate interest on interest) until later on anyways? Brokers simply wanted to make as many loans as possible, and then pass them on and collect fees. Because they didn't hold the loans on their books to earn a spread, the interest rate of the loan (relative to the bank's cost of capital) doesn't matter. And as long as prices continued to rise, people would simply sell their houses before their 1-7 years were up, and pay off their mortgage anyways. Can you please explain why low short-term interest rates (fed funds rate) acted as a floor for teaser rates?

Is it just because these low short-term interest rates are the bank’s (or broker’s) cost of capital? But the brokers and banks didn’t hold the loans on their books.

Can’t an ARM be structured in any way, i.e. couldn’t lenders make the teaser rates 0% if they wanted? I thought the whole point of an ARM was simply to defer payments (and I guess accumulate interest on interest) until later on anyways?

Brokers simply wanted to make as many loans as possible, and then pass them on and collect fees. Because they didn’t hold the loans on their books to earn a spread, the interest rate of the loan (relative to the bank’s cost of capital) doesn’t matter. And as long as prices continued to rise, people would simply sell their houses before their 1-7 years were up, and pay off their mortgage anyways.

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