One way homeowners attempt to manage their payment risk is to use fixed-rate mortgages, which typically allow homeowners to prepay their debt when interest rates fall but do not involve an increase in payments when interest rates rise. Homeowners pay a lot of money for the right to refinance and for the insurance against increasing mortgage payments. Calculations by market analysts of the “option adjusted spread” on mortgages suggest that the cost of these benefits conferred by fixed-rate mortgages can range from 0.5 percent to 1.2 percent, raising homeowners’ annual after-tax mortgage payments by several thousand dollars. 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, though this would not have been the case, of course, had interest rates trended sharply upward.

American homeowners clearly like the certainty of fixed mortgage payments. This preference is in striking contrast to the situation in some other countries, where adjustable-rate mortgages are far more common and where efforts to introduce American-type fixed-rate mortgages generally have not been successful. Fixed-rate mortgages seem unduly expensive to households in other countries. One possible reason is that these mortgages effectively charge homeowners high fees for protection against rising interest rates and for the right to refinance.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

via FRB: Speech, Greenspan–Understanding household debt obligations–February 23, 2004.

COMMENT:

Here is the housing bubble timeline on Wikipedia. People have expressed puzzlement on how Greenspan missed the housing bubble.

He didn’t. The above statement is at least one element of his own huffing and puffing to further inflate the bubble.

He saw that it was all about to end and put out a statement to encourage lenders to keep it going to a new level. As the Wikipedia describes 2003-2007:

The Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned loan standards (employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability), emphasizing instead lender’s ability to securitize and repackage subprime loans.^[28]

In under two years, Greenspan was able to get out of the Fed and go on to make millions in the private sector (except that the Federal Reserve is private and all Greenspan’s millions were related to his public influence, so it is a meaningless expression in our world).

I still hear people (especially fellow Republicans) talk about how the housing crash came because people bought houses they couldn’t afford. This is disinformation–an evil projection of the sins of the upper class on the lower.

It is true that virtually no American hates debt as much as he should, as much as the Bible tells him to do. This has been a design of American policy at every level (public school, media, government “consumer protection,” etc) for easily over a century. The design was a success. It was to make Americans vulnerable to predators–who are the ruling class of the United States. Greenspan was openly providing cover for a hard press sales job that would attempt to get more people to take on more debt.

The government was out to consume the weakest of their people. They are Alan Greenspan’s food.

As much as people claim that the poor are unwise, they neglect to point out the obvious: that the poor are unwise because they trust people who have money and power. They are prey. The government and ruling culture of America, from the Federal Reserve, to Wall Street, to the education system, to the news industry, are all a system that is a predatory lender.

In 2004, it looked like the law of diminishing returns was about to be felt. Greenspan wanted to buy more time and see more people squeeze more money out of the system before the crash.