Thursday, October 30, 2008
Rush Limbaugh Profited From Your Adjustable Mortgage Nightmare
Ah, the adjustable mortgage....
In order for this to be an appropriate product for a borrower, they need to have a considerable cash cushion. They need to have enough rainy-day money where in the event of a housing or mortgage market collapse, they're capable of dipping into their pockets to put the additional money needed down to secure a fixed rate mortgage.
For example, consider the $400,000 adjustable mortgage borrower. Assume they put a *healthy* 10% down on a $440,000 house.
Since then the market has corrected; their house is now worth $350,000. To lock in a new 10% down, fixed rate loan, that buyer would need to pony up $85,000.
Quite frankly, people that buy $440,000 homes do not generally have $85,000 extra sitting around in the bank. Nor do people that buy $220,000 houses usually have $42,500 of rainy-day money either.
I do know one guy who has about a 500k adjustable mortgage on a 700k house. Though he has plenty of cash. In fact, he probably earns 500k in annual income. But other than him, the number of people financially fit enough to borrow on an adjustable basis is almost nil.
Ergo, it follows that the adjustable mortgage is a trap, a con, and snake oil all at once.
I'd only recommend adjustables to my sworn enemies.
On the other hand, Rush Limbaugh has been bombarding his listeners with ads for Quicken Loans and their exotic, non-fixed rate mortgages for years now.
So he's in a profit (obscene?) sharing plan with financial hucksters.
By carrying these ads on his show, he's legitimized a toxic product; he's harmed who knows how many of his listeners naive enough to swallow *you GET to refinance*.
Here would be Rush's defense:
HypotheticalRush - Well, these products saved a lot of money for people as interest rates were trending down....and house prices were rising.
HypotheticalRush - I am not into paternalism. I believe my viewers are smart enough to look out for their own best interests.
Plausible arguments? Well that would be a subjective judgment.
I would never take these ads without, minimally, constantly lecturing my audience about the risks. Even with simultaneous warning, I'm still not sure that I'd take the payola to broadcast such outright hucksterism.
Me? I feel horrible if someone buys a stock or commodity I recommended and loses a few grand.
HypotheticalRush - It's the radio network that chooses advertising. They are a business intent on maximizing profits.
Ah, there's nothing like morality sustained by a couple of *degrees of separation*. Yet they have to maximize profits to pay the host his $400 million contract.
Rush's best defense is probably ignorance. Old, wealthy guys have almost categorically missed the housing bubble.
Meanwhile the marginal buyers, young renters who can afford to buy, who've crunched the numbers and seen a historical chart or two, we've been far more lucid on this matter.
I understand that any media business would have great difficulty turning down the highest bidding advertisers.
But still, they might ask, "How can this exotic mortgage company afford to spend so much on ads?"
And they might do well to remember that snake oil is one of the highest margin products ever invented.