{"id":1966,"date":"2007-09-24T12:25:39","date_gmt":"2007-09-24T19:25:39","guid":{"rendered":"http:\/\/www.bloodhoundrealty.com\/BloodhoundBlog\/?p=1966"},"modified":"2007-09-24T12:25:40","modified_gmt":"2007-09-24T19:25:40","slug":"the-odysseus-medal-getting-arms-back-up-on-their-own-two-feet","status":"publish","type":"post","link":"https:\/\/www.bloodhoundrealty.com\/BloodhoundBlog\/1966\/the-odysseus-medal-getting-arms-back-up-on-their-own-two-feet\/","title":{"rendered":"The Odysseus Medal: Getting ARMs back up on their own two feet"},"content":{"rendered":"

If you didn’t look at this week’s nominees for The Odysseus Medal<\/a>, you should. We had 20 posts on the short-list, but 24 more that were also very good.<\/p>\n

Here are this week’s winners:<\/p>\n

This week’s Odysseus Medal goes to Peter Coy at BusinessWeek for Believe it or not, the ‘optimal’ mortgage is an option ARM<\/a>:<\/p>\n

If you had to name the most toxic, dangerous, foolhardy kind of mortgage loan that exists, you’d very likely pick a pay-option ARM, which lets borrowers get deeper into debt by paying less than the minimum interest they owe each month and adding the unpaid interest to the loan principal. Worse yet, you might say, would be a pay-option ARM with a very high penalty for prepayment so borrowers can’t get out of it easily once they’re in it. There’s a move afoot to ban these worst-of-the-worst loans.<\/p>\n

Guess what? The worst is actually the best.<\/p>\n

Yes, according to a new study by professors from Columbia and New York universities, the “optimal” mortgage in a perfect world is precisely that kind of loan—an adjustable-rate mortgage with an option for negative amortization and a ban (or at least severe restriction) on prepayment.<\/p>\n

Crazy? Not as crazy as you might think. The key, according to professors Tomasz Piskorski of Columbia Business School and Alexei Tchistyi of New York University’s Stern School of Business, is that this kind of mortgage is optimal only in a perfect world—namely, one in which borrowers are fully rational and always do what’s in their own best interest.<\/p><\/blockquote>\n

ARMs are like the miracle drug that can’t get over its tabloid reputation. This post won’t rehabilitate them, either, but it’s a start.<\/p>\n

The Black Pearl Award become the Snow Pea Award this week. The winner is another testament to the epicentricity of the epicenter of real estate weblogging, Tucson’s Dave Smith, who graces us with Growing Peas in a Day!<\/a> Here’s the Black Pearl:<\/p>\n

Stop ripping your blog apart.<\/p>\n