Archive for the 'Mortgages' Category
Bailout Thoughts
I read this article in the New York Times this morning and I’ve been thinking about it for a good part of the day.
Short synopsis: not only were lower income home buyers sucked into adjustable rate mortgages and equity stripping, but so were higher income individuals. *gasp*
A few examples were given where “real estate consultants” and a lawyer were able to re-negotiate their mortgage terms with their lenders. Either their loans were refinanced into fixed interest rates or principal balances were reduced, or both. One of the “real estate consultants” had their principal balance reduced by 27%!
I know that a little over two weeks ago, Bernanke broached the subject of principal reductions as an alternative to simple interest rate reductions. I’m not a big fan of this suggestion and feel interest rate locks are more appropriate and fair to all those involved.
It’s like the stock market, if you buy a stock at $170 a share and it goes down to $2 a share (does that ever happen…), you lose out. Houses should be the same. If you pay $500,000 for a house and its value goes down to $350,000, that’s how it works. A house is called an “investment” for a reason. Sometimes investments go up, sometimes they go down. That’s the risk. The bank shouldn’t bail you out with principal reductions. That only hurts other homeowners that continue to dutifully pay their mortgages.
Perhaps most troubling is the nagging thought in the back of my mind about lower income buyers. Do they know that they can negotiate with the bank if they are in trouble? Has this even been presented as an option to them? Or is it only the more sophisticated buyers that know how to “work the system” to improve their situation?
Would You Walk Away From Your Home?
Have you heard of the term “jingle mail?” It’s hipster lingo for someone mailing their house keys back to the bank and walking away from their home. A less amusing term is “ruthless default.”
Calculated Risk has an interesting blog today that consolidates a few articles that cover a rising trend of people abandoning their mortgages and, subsequently, their homes. I saw an article last week that claimed that 10 to 15 million households may walk away from their homes.
But will it really be that bad?
One of the regular contributors at Calculated Risk questions the lack of data used to support these claims.
At what point would you consider walking away from your home?
If you could still afford your mortgage payments and had no real reason to move, but your home was now worth significantly less (say 30%) than what you owed the bank, would you consider walking away?
Do you believe that there is a moral or ethical obligation to repay the bank when you take out a loan? Or is the bank’s ability to be “repaid” by taking back the house enough?
Mortgage Rates (Inflation vs Recession)
I see articles about interest rates going down every time I scan the business news. Either the Federal Reserve just cut rates or Wall Street is demanding further cuts. Yet after briefly going down, mortgage rates are again on the rise. What gives?
The key to this mystery is that mortgage rates are based on long-term interest rates (like the 10-year Treasury rate) rather than the short term rates that Federal Reserve influences. Short-term and long-term rates often move in the same direction, but not always. And our current economic environment is an example of when they go their separate ways.
The US economy is at a crossroads. Growth is slowing and the talking heads cannot agree about whether we are headed towards a recession or something far less serious. This debate is important because it plays a big role in the direction of the long-term interest rates, and therefore the mortgage rates.
With the Federal Reserve aggressively cutting short-term rates, they are signaling that they believe a recession is the biggest risk and are working hard to avoid it. If they are correct, then consumer and business spending will continue to fall and the low interest rates will be an important factor in stabilizing and eventually increasing spending. According to this view, the long-term interest rates and mortgage rates should be going down with the short-term rates.
The long-term rates are not going down because enough investors are convinced that the economy is going to make it through this slowdown just fine - they believe that the Fed’s rate cuts are unnecessary. In this scenario the low short-term rates cause spending to increase too quickly, which puts upward pressure on prices (like gas and food), leading to general inflation.
So if you are planning to buy a home in today’s environment and are looking for a better rate, you want to cheer every time someone mentions recession. As crazy as that sounds.