After making comments that suggested Americans can save tens of thousands of dollars by using an adjustable rate mortgage (ARM) instead of a fixed rate, the head of the Federal Reserve admitted he personally didn't follow that advice.
Fed Chairman Alan Greenspan, often accused of talking out of both sides of his mouth, now wants to modify his recent remarks about the desirability of ARMs over fixed-rate. In a question and answer session at the Economic Club of New York earlier this week, Greenspan said he "probably spoke imprecisely" when he talked up the cost savings of ARMs in a speech to credit unions last week in Washington.
At that time he said "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." Homeowners pay a lot of money for the option to refinance and for protection against increases in mortgage payments -- anywhere from 0.5 percent to 1.2 percent extra, he said. The Fed chairman suggested consumers would benefit if lenders offered greater mortgage product alternatives.
This week Greenspan backtracked a bit. "I did not mean to disparage the 30-year self-amortizing mortgage," he said. In his previous speech, he said, he had been focusing on a "narrow segment" of the market that might prefer an alternative to the 30-year fixed-rate, either variable rate or perhaps a variable maturity mortgage.
In New York this week, Greenspan went on to describe the 30-year mortgage as one of the U.S. market's "great inventions." While last week he said borrowers in other countries rejected the fixed-rate alternative because they found it too expensive, this week he suggested that many other countries would be "delighted" if they could shift some variable-rate mortgages to fixed-rate. The popularity of fixed-rate mortgages in this country, in spite of the premium it entails, demonstrates how significant risk aversion is for many individuals, he said. And the chairman confessed that he, too, had always opted for a long-term mortgage when he needed to borrow on real estate.
More than one-quarter of all loan applicants currently prefer ARMs, according to the Weekly Mortgage Application Survey released yesterday by the Mortgage Bankers Association of America.