Thursday, December 6

Interest Only - Worse than Renting

Oh my. How quickly the housing market situation has changed. At least now I don't have to defend my claim that the housing market was in a bubble seeing that it has been popping for all to see for the last couple months. We'll just overlook that it has been popping for over a year already. My first post on the housing bubble was all the way back in August, 2005 when I wrote about the DC bubble:

You read it here first. The DC housing market will pop and it is going to be a dramatic event. - FFI - 20 August 2005 (Note: Surely, there were other 'first' voices.)

So now that the markets and the Government have recognized that there is a problem, they are busy trying to find a way to fix it. I had already written about this once before in my post "No Bailout for Homeowners in Trouble"

The talk of an outright bailout seems to have diminished. Instead, now the plan is to legislate changes to the holders of some of these subprime loans. And by change, I mean freeze the adjustable rate of the loan.

I have problems with the Government stepping in to protect...actually I am not sure who they are trying to protect. On the surface, you would think they are acting to protect the homeowners, but is it fair to force them to stay in a house they can't afford, and most likely won't be able to afford their mortgage payments once the freeze expires, if they can continue making their payments that long.

"It's a big misconception to think that (mortgage) resets are responsible for the delinquencies," Laperriere said.

Of the subprime loans made in 2006 and scheduled to reset in 2008, some 25 percent are already delinquent, he said.

"What's driving the delinquencies is that people can't afford the initial payments," Laperriere said.

That's a problem Paulson's plan won't fix. - Bloomberg (Found at Housing Bubble Blog)

Don't get me wrong. I am not against adjusting loan agreements, but that should be an issue between the 'home owner's and the banks, or whoever holds the loans. There are all sorts of adjustments that can be made, such as:

  • Eliminating the prepayment penalty,
  • Extending the interest-only period of the loan and then giving a full 30 years to pay off the principal once the loan rests to a (rate-frozen) adjustable rate loan
  • Turning the loan into a fixed-rate loan
  • Permitting more and more generous short sales.

Many of these loans have already being sold at deeply discounted prices, so the new loan-holders have a good deal of margin to cut the home owners a break and still make a profit.

Another possibility for the banks, given that the 'professionals' seem to have the opinion that this is just an 'anomaly', is to offer home loans in excess of the current value of these homes. In other words permit mortgages with a total value in excess of the current market value of the home. After all, if the value of the home is going to continue rising over time, as they claim, then why not put them into a better loan with a lower payment, that after a short time, a combination of appreciation and (hopefully) mortgage payments will have the value of the loan at a point less than the value of the home.

Of course, if the houses aren't actually worth what they were when they were sold and now your 'homeowners' are walking away from their obligations, they can always partly write off some of the principal of the loan. It would be kind of like agreeing to a short sale, without selling the property. This has an additional benefit of not requiring a buyer since almost nobody is interested in buying a house at the moment. So they might as well do whatever possible to keep those already in the houses, in them and paying off their mortgages.

So, there is no shortage of creative solutions to this mess of their own creation as you can see from my suggestions above. Surely, Wall Street, the mortgage industry and the banks can come up with something even more creative. And best of all, it won't involve the Government.

However, I don't think anyone should rush in to save those in trouble. Many of these people are doomed to be foreclosed on regardless of what you do for them; Write-off the loan and give them a clean title? Great, now they can extract more equity out of the house with a new mortgage or home equity loan. Hell, Senator Clinton is calling for a three-month halt to foreclosures. That's a great Christmas present; Three months-rent free, and at the end of that time period, they still have to get around to evicting you. Of course, the list of those to be evicted would have grown greatly during that time. This kind of action will help nobody except perhaps win a couple of votes for Senator Clinton. This example also points out a big problem in all of this, in that many people who are having problems right now, are not doing much about it. They are not getting rid of their luxury cars. They don't seem to be doing much of anything other than abandoning their mortgage payments. Many are abandoning them well before the interest rate resets that they are talking about freezing. Also, many are investors and other who have loans other than the type that will be covered, so if something is to be done, it will probably have to be an industry-wide solution, as the Government one is going to be limited, if anything at all:

The plan would also seemingly exclude borrowers who hold option-ARMs that aren't subprime. These are loans that start with extremely low "teaser" rates before rising dramatically a few years into the loan.

It has also been reported that homes that were bought as investments - as opposed to for the purpose of living in - would be excluded.

More than 50% of the increase in delinquent mortgages are actually investor-related, said Wachovia senior economist Mark Vitner. "It's hard to conceive how many people are actually going to meet this criteria. There's nothing at all in there that addresses investors," said Vitner, who added he doesn't support an investor bailout. - CNN

The funny thing about a rate freeze is that there is no guarantee that rates won't go down, especially considering that the FED keeps dropping interest rates. Then what? I can already hear those begging for this relief to come through complaining that they were tricked, once again, into being taken advantage of. This of course is a possibility, and I would think a strong reason why someone would take an adjustable loan, being the possibility that the rate will go down. These people had no intention of sticking with these loans; they just took them because they offered the lowest rate. Now what happens at the end of the rate freeze period if the housing market does not get better or housing prices end up worse than they are now. How many will complain that they really wanted to be forced into foreclosure years ago but (thanks to the freeze) they were forced to stay in their homes, paying much more than they would have paid in rent for a comparable place, and are now suffering a much-greater financial hit than if the Government just minded its own business.

Another odd thing about all these people abandoning their homes, is that many of these 'homeowners' are going from a position of little cash to having lots of cash as they are no longer paying their mortgage nor are they paying rent. So while the housing market might be screwed along with the businesses that support it, could it be that the general economy will keep chugging on like before with whatever loss due to the housing downturn compensated by increased foreign input, such as increased exports, due to the increased buying power of other currencies.
Maybe this experience will kill-off the idea of interest-only loans. That was an incredibly stupid idea, not only for the mortgage industry, but also for those who took the loans. Surely people profited from them, but now many of them are also being burned by poor lending standards, even if no more than ruining the industry they earned their income from. Really, when you are paying only interest on your mortgage, you are no better than renting. In many respects you are worse off. I have a landlord to call if there are any problems with my apartment. They are more like serfs paying a portion of their salaries to the mortgage companies who have become their 'lords'.

Imagine if the Government rushed and acted to limit rising house prices.
Just think of the outrage from the homeowners who were planning on large cash windfalls when they finally sold their homes into a rising market.
These are the same people who are in trouble now.


More thoughts at the following Blogs, both of which provide no shortage of examples of homeowners in trouble who have nobody to blame but themselves:

More Financial Malpractice from the Union Tribune - Bubble Markets Inventory Tracking

Politicians and Bush say ‘F-you’ to RESPONSIBLE Americans and extend the housing bubble 5 more years (at least) - Housing Bubble Casualty

1 comment:

Anonymous said...

Good luck on trying to get a mortgage lender to waive the early termination penalty. Especially scumbag Countrywide who charged me 9000.00 to get away from them in March of 2005.