Right now there's some sham propagated by our government where it's ostensibly *stress testing* the nation's banks - particularly the large ones - for financial integrity.
Let's put aside the silly notion that as highly regulated entities, this kind of auditing should have been going on all along by our elected officials.
Without even researching what these so-called stress tests are examining, I presume they are ignoring the most significant variable of them all - low interest rates which derive from sky-high Treasury prices. This, long-time readers know, I've been saying for a while now. And note that EVEN WITH nominally low mortgage rates, housing is still spiraling down the toilet!
I submit that if the Treasury market dumps, and mortgage rates scream past 7% and 8%, that all these banks will be roasted by their mortgage books - no matter what the *employment rate* - no matter what the level of *reserves* - no matter what the current *spread margin*.
So I just don't get the mad rush today for banks like Wells Fargo and Bank of America to go hog-wild selling *refi's* and effectively expanding their mortgage books. It doesn't well matter what home prices are - whatever home A is with 5% rates, its marginal cost of ownership and therefore its market price, can arguably go down another 19% with an uptick from 5% to 7% in mortgage rates.
You see, it's been proven that the number one cause of mortgage default is actually *negative equity*. Loan type, geography, demographics,....that's almost all irrelevant. This is a point that Mr. Mortgage, Mark Hanson, has been trying for a while to drive home.
These banks think that since their current borrowing costs are near zero, that they can write 5% loans with abandon to *those with good credit*. I think they are completely out of their minds.
The fact is, if the US Government could borrow money at 3% for 10 years - as it can today - then why hasn't it been doing so all along?
Because it can't. All the clowns are mistaking an anomaly for the new and permanent baseline.
Prepare yourselves for interest rate mean-reversion, even if your banks and Big Government aren't doing so.
11 comments:
I'm not an expert on banks, but aren't all of the actual loans being passed on to FHA, etc.? In other words, the banks get the refi fee, they get the servicing revenue, but they don't carry the loan risk. Your thoughts?
So if you are in a mortgage long term-would you say refi now to lock in this anomaly? Add a couple years onto a couple year old mortgage and cut your expense? Or does it make sense to stick with the current payment which is a point or so high because you will be paying down principle faster. Particularly for people that will likely not be in their (my) homes for the full 30 odd years.
They are passing along a lot; who knows exactly how much? That's a good question.
They get servicing revenue from FHA loans? I didn't know that.
I honestly don't have a good answer to whether or not you should refi, drag the loan out, or pay off the principal. I'll have to think about it. I believe one can always refi from a 30 to a 15 or 10 year term. That's what my parents did a couple of years ago. And that's one of the things I always recommend.
I've discussed this before. I think realistically, homebuyers should only look at what they can afford for no more than a 15 year mortgage. A thirty year loan borders on the ridiculous because the principal is paid off way too slowly. And when you think about it, *30 years* is a duration that should only be bandied about when talking about prison sentences. Hence the expression *debt slavery*.
What really sucks about the housing market is that one pretty much has to be a jack@ss and lever up their personal budget to procure a nice house in a nice area. It's really out-of-control.
Anon,
There are refi calculators all over the I'net (bankrate.com for instance) that you can use to determine how long the payback or breakeven duration is for whatever scenario you input. Usually you need to get a refi for 1% less than your current loan for the payback to make sense.
If you are going to stay in your home, seriously consider a 15 yr loan - the payment is a bit higher but the interest rate is a chunk lower and you will actually pay your laon off before your kids put you in diapers.
Thinking refi for 15 years at about 4.375. Raise my payment by about 500$ but that's no big deal. One of the nice things about living under ones means. Cuts the total interest paid from 300K or so to about 135K. Coincides nicely with the oldest child being 19 when the thing is paid off-assuming the unlikely occurrence that I still live here.
I didn't sign my previous post.
Slow out.
BTW: I kind of knew where I was going with this but was looking for some input. Thanks.
The servicing revenue is an assumption on my part. A neighbor has a VA loan, he is a bad risk / chronic (no pun intended) late payer, Wells milks the hell out of it directly. When the debtor finally can't cough any more late/penalty fees and defaults, Uncle Sam makes Wells whole on the default. This is such a great deal for Wells, one must assume they replicate it across the entire spectrum of government-backed loans.
I am a little behind on the news, but just read something to the effect that President Obama wants to convert TARP loans into bank stocks. Now that's just criminal. Pure banana republic type stuff.
Whether you refi or not is a matter of refi costs vs expected interest savings.
There is guesswork involved: how long do you expect to be in "this" house etc.
As for the principal, you can pay that down anytime you want. Just add some to your payment. That is independent of refi considerations.
It's very easy to compute how much extra you need to pay (monthly) to retire your loan in whatever time frame works for you.
*How long* one plans to stay in a house is not a definite rule for refi/debt considerations.
We're in the realm of the subjective here. How much debt does one want to have? Which risks/rewards are they willing to bear - e.g. loss of principal, locking in a low payment, maintaining personal liquidity,...
There are no right answers, only conceptions and misconceptions of reality.
I disagree.
To be excruciatingly accurate I should have said how long you expect the loan to persist.
You can use that to compute your total interest costs which are a key parameter in determining the possible savings from a lower interest rate. That has to be balanced against refi costs.
To be sure, it is fuzzy. You can't tell if (e.g.) unanticipated events will take you somewhere else.
But you can guess and that's better than blindly rushing ahead with refinancing (which can cost you in a big way). You had to guess that way when you purchased the house/acquired the mortgage in the first place, no?
Some lenders offer what is called
"zero cost" refinancing which means the borrower doesn't have to pay any refi costs (in exchange for a slightly higher interest rate). In that case the need to guess is eliminated.
I know someone who got a 5 year ARM on their first home, oh, about 4 years ago.
I asked them why they chose that loan type and they responded, "....well, I won't stay in that house more than 5 years."
I never could unearth the *wisdom* of that reasoning - which surely originated or was corroborated by the lending agent.
We're conflating more than one debate here to the detriment of clarity. In my last comment, I just wanted to express my disagreement with *how long one stays in a house* as prominent variable in borrowing decisions. To me, buying a house is simply a question of how much debt one is willing to take on, how long they want to be servicing it, and how much of a bet are they willing and able to place on the moving mortgage and housing markets.
Okay, maybe it's not so *simple*!
That guy with the adjustable did recently *lock-in*, but his house is still in a negative equity position, and will have trouble selling at all in a foundering development of facsimiles - many of which are now *bank owned*. In other words, he unwittingly made a bet on interest rates (which he won) and had higher personal liquidity over the past 4 years (which he may or may not have saved)....
....but he nonetheless still finds himself pretty screwed right now.
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