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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Sunday, August 19, 2007

Mrs. Astor

Ways of the World has talked before about modern-day philanthropists, in particular, how they put their funds earned in business to good use for society. Brooke Astor is another example; while she inherited the funds she gave toward a multitude of good causes in New York City, those funds had their origin in business efforts.

The first John Jacob Astor traded furs all the way to Fort Astoria, Oregon, at the mouth of the Columbia River by 1811. From the 1830s (according to Wikipedia), he believed New York would become one of the world's great cities and he began to buy up huge parcels of Manhattan real estate. At his death in 1848, he passed on a fortune estimated at $20,000,000. However, a biographer, James Stokesbury, reminds us that Astor was not the nicest man in the world. "To the end, money was his passion, and to make it his men evicted widows and debauched Indians." [, American History Magazine]

Mrs. Astor was not out to make up for this lack of character in her husband's ancestor or his other progeny; she was, by her own estimation, trying to leave society better off than it would have been without her. She could clearly do no more. But perhaps the good she has done with this money can put salve on that earlier pain. Regardless, her many beneficiaries are surely appreciative of her largesse. I know firsthand. My Church, St. Ann & the Holy Trinity in Brooklyn, was the recipient of grants from the Astor Foundation, one of them among the last grants before it was dissolved. These funds provided for the restoration of several of our mid-19th Century stained glass windows, the first figural windows produced in the United States. The one shown here is a 40-foot masterpiece that towers over the entire sacred space. The church building and these windows were provided in the 1840s by another businessman, Edgar John Bartow, a Brooklyn paper manufacturer.

So as we think about these people and how they make their money, let us also give thanks for those stewards who put that money to such marvelous uses. People in Harlem, who live on Astor Row, know this about the houses they live in. The staff of the Metropolitan Museum knows this; not only did Mrs. Astor support the museum's collections, she gave an endowment to provide in perpetuity for the staff Christmas party. She supported the New York Public Library most of all, and we ordinary people who just want to browse for books have her to thank for the Library's acquisition of an old department store building that became the Mid-Manhattan Library. So thank you again, Mrs. Astor. And thanks too to old John Jacob Astor, who began with almost nothing and left us the wherewithal to build a future – and for St. Ann's Church to preserve its past.

"The Glorification of Christ" by William J. Bolton and Robert Bolton, 1844-1848. Church of St. Ann & the Holy Trinity, Brooklyn, New York. Restored 1997 by David Fraser and the Staff of the Brooklyn Stained Glass Conservation Center. Photo by David Fraser.

Monday, August 06, 2007

More Lessons About Markets and Mortgages

In an eMo last week, Mother Crafton gives a strong endorsement to our July 30 article on mortgages and the stock market. Barbara's comments are very gratifying, and we thank her. We highlight here one point she says she heard in our words: "it's not a simple good guys/ bad guys story". Oh, yes. Ambiguity pervades all of the market action presently, and if you come away with this one concept alone, we'll be pleased. In seeking to sort out the concerns, we can't put the whole blame on lenders, nor on borrowers. We said last week that regulators support subprime mortgage lending, but obviously they can't feel good about foreclosures and the bankruptcy or closure of a rising number of mortgage companies.

Ambiguity in the Markets and Among Policymakers, Too
Today, August 6, markets continue in erratic trading. After selling off sharply Friday, the major market indexes have turned up, but the number of companies with falling prices exceeds that with rising prices. Tomorrow – Tuesday – the Federal Reserve's monetary policy committee meets in a regularly scheduled session. They are likely to leave their basic short-term interest rate, the federal funds rate, unchanged at 5.25%. They've worried lately more about inflation, as they should. Keeping the value of money sound is their job. But they can't ignore risk, so they too face ambiguous conditions as they set about their policy-making.

Meantime, Barbara also suggests to me that many of you might be worried about your own mortgages, and this is indeed a topic worthy of our consideration here. One other lesson we hope you hear in our articles is that when you make a financial commitment, whether to buy an asset or borrow money, you need to understand the terms. When we discussed retirement plans a couple of months ago, we urged that, if you are selecting some investment program, you should be able to make sense of the features of the program you choose. The same goes for the terms of the debts you incur. This is really important for your mortgage, since it is probably a very large obligation.

Many Unaware of How Much Their Mortgage Rate Can Change . . .
All too often borrowers are not aware of the way their mortgage works, and they get hit when they don't expect it. Federal Reserve analysts parsed the results of one of the Fed's periodic Surveys of Consumer Finances. It asks questions about how much people know of the terms of the mortgage they carry. As we mentioned last week, the people with adjustable rate mortgages ("ARMs") are having the most difficulty. Now, as in 2001, when this specific survey was taken, about 30% of all mortgages are ARMs or some "hybrid" type. In the 2001 poll, the largest number of responding borrowers believed that the most their adjustable interest rate could adjust at one time was 1 percentage point. But a parallel survey of lenders said that most ARM mortgages could move as much as 2 percentage points at once. Big difference, especially early in the mortgage, when you're paying almost all interest and little principal. Further, 57% of borrowers believed the most their rate could increase over the whole term was 5 percentage points, but only 6% of the lenders said it was that small. In fact, 25% of lenders reported that the rate could go as high as 12%, but only 2% of borrowers thought that. See the potential for surprise among uninformed borrowers.

. . . or How The New Rate Is Determined
Borrowers can watch financial markets to gauge in advance how their mortgage rate might move. But they have to know which rate is the relevant one in the formula for the change in their loan's payments. The lender survey indicated that two-thirds used a Treasury bill rate and the rest use a money market rate such as the "London Interbank Offered Rate". Only 25% of borrowers mentioned these rates at all; the largest number thought their rate floated with the so-called prime rate and a number of others said it was some completely unrelated measure.

Low-Income Borrowers More Vulnerable and Less Informed
Fortunately, for the bulk of mortgages, the standard 15- or 30-year fixed-rate loans, the vast majority of borrowers are informed about the terms. But as we see, those with ARM loans often miss some of the very salient facts about the structure of their debt. The Federal Reserve analysts tested the sensitivity of people's budgets to this situation. They calculated some possible scenarios for the size of payment changes. For high-income households, the range the payment changes might take was only a modest fraction of household income, limiting the impact of the any rate surprise. But – and this is the crucial issue – if borrowers have less than median income, they are less likely to be aware of their mortgage terms in the first place, and the payment change by definition will be a larger proportion of their income.

So for you who visit this website, we'd surmise that the harm to your own family budget from an unexpected change in your mortgage payment would be unpleasant but manageable. However, for your friends who might have lower incomes – or your children who might be just starting out – the hit could be bigger.

Market Moves Faster Than We Can Write!
All this will be a concern until these mortgages pass the anniversary date when their rates reset. The recent path of interest rates has been more stable, which should limit the frequency and size of upward rate adjustments after that and possibly even bring a bit of relief. So all is not lost here. Stock markets sense this, it seems, and this afternoon while we have been writing, the Dow Jones index has moved markedly higher, as investors seek bargains.

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