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URL:  http://boards.fool.com/hi-cp-im-struggling-to-understand-the-logic-30282661.aspx

Subject:  Re: 30 FRM cheaper now than 5 yr ARM Date:  9/25/2012  2:52 PM
Author:  Dwdonhoff Number:  124309 of 127683

Hi CP,

I'm struggling to understand the logic behind how a 30 yr FRM can possibly be cheaper than a 5 yr ARM.
As per usual, Peter explained it much more elegantly & succinctly than I would have.

You *may* note in my OP that I mentioned this anomaly cannot endure... the free market pressures are as inescapable as gravity. The manipulators can run, but they cannot hide, and natural risk-equalizing forces *always* prevail eventually.

There was a brief period in either 2005 or 2006 (IIRC) when a similar cross-over occured, and hell froze over as I recommended the 30 FRM as the financially superior choice to the 5 yr ARM. It lasted about 3 months.

NOW... at present the ARM pricing is actually very much 'all over the board' among various lenders... it is not at all a liquid or consistent marketplace. Cath showed me an example where the 5 yr was still much cheaper yesterday than the most competitive 30 FRM we both saw... so, it still pays to engage people who keep their finger on the broad lenders/providers.

HOWEVER... the fact that this is all in disarray at all comes back to Peter's explanation. Common risk/reward logic is out the window at present.

Cheers,
Dave Donhoff
Leverage Planner
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