For Bove, the end of Fannie Mae and Freddie Mac will radically shake up the kind of mortgages most Americans will get.
"If Fannie and Freddie go away, what then happens to the mortgage markets?" asks Bove. "The answer to that question is that we no longer have things like 20-year and 30-year mortgages because banks are not going to put that type of mortgage on their balance sheets. And we won't have fixed-rate mortgages."
Unlike the rest of the developed world, most homes in the US are bought with long-term fixed mortgages. Prior to the Great Depression, mortgages often required 50% down with interest only payments for five years with the principal due in full after those five years were up.
Yeah, the good old-fashioned "balloon note." We didn't have fancy computers then or the banks would have screwed the people in the 20s just like they did in the 2000s. But since you had to be able to figure out the interest with a piece of paper and a pencil (or its rough equivalent) the sort of fancy-pants garbage (negative-amortization and similar) was impractical, as was securiritzation.
Nonetheless the banksters managed to figure out how to get people to use lots of leverage anyway with balloon notes -- and huge percentages of those "buyers" lost their house when they discovered that they had inherent gearing of 5:1 or even more.
"If your mortgage cannot be a 30-year fixed-rate mortgage – [if] it's a 10-year adjustable rate mortgage – then, the monthly cost of owning a house goes up dramatically," says Bove. "And, if the monthly cost of owning a house goes up dramatically, the price of the house goes down. There is no equity buildup in order to have home equity loans in order to buy cars, boats, what have you. So, it has an impact on the overall economy, not just Fannie Mae and Freddie Mac."
So Bove, who claims to be an "analyst", doesn't understand that this is all a balance sheet?
Or is he intentionally omitting that little point?
Because if you have a 10 year adjustable rate mortgage after ten years you no longer have any payment at all. Even better you pay a lot less in interest during those ten years.
How much less?
Let's take a 30 year mortgage for $200,000 @ 6% interest. Your monthly "nut" is $1,193.14. Over 30 years you give the bank $429,528.73 in earned income to "pay" that $200,000.
Now let's assume the mortgage is for 10 years at a 5% interest rate. Your monthly "nut" is roughly double -- $2,112.521. But -- over 10 years you give the bank just $253,500.98.
The $176,027.75 you do not give the bank will buy a hell of a boat and a whole bunch of cars, all of which you will be able to buy for cash!
And that assumes the price of the house doesn't get cut in half. It will. Now you have $302,778 more in your pocket over that 30 years of time, and you have the same place to ****, shower and shave that you would have had with Fannie and Freddie "in the market."
Now there are those who will argue that it's all a "wash" because you "build equity." That's false -- the additional interest you pay is gone from you forever, and goes to someone else.
Sure, if you happen to own a million dollar house you might be very interested in not seeing the price cut in half as these unsustainable and ultimately bogus "financing" options disappear.
But if you do not own a house now then would you rather pay $100,000 for it -- or $200,000?
People like Bove need to be publicly called out, shamed and shunned -- and that's being charitable.
Straight from the lions that will be happy to eat you comes this tripe, sent to me by a loyal reader.
Home ownership is still at low levels comparatively from the past even though affordability is at an all time high, why? New household formations are at an all time low.
More and more young adults are shacking up in their parents home for years. Why is this occurring? Hard to say.
Perhaps it’s the fear of another bubble? Maybe it’s just that much harder to get a home loan? Too many investors with cash offers? Maybe their just lazy strong headed kids with spineless parents?
Jesus you're stupid if you actually believe that crap.
Listen to this advice from the same "article":
Let’s not assume everyone we know, knows what’s going on out there. Bottom line, they could use your help.
And when we say “talk” to them, we don’t mean send them an e-newsletter with a turkey recipe on it. We mean actually physically speaking to them and having an honest conversation about the awesome opportunities that are available in housing right now.
Can I have a lobotomy with my real estate pumping please?
Christ on a tree, will you folks in the so-called Real Estate "business" wake the **** up?
Young people are incapable of buying a house because they're too damned expensive and with interest rates at all time lows there is only one way for them to go -- and when they do the imputed price of the house will fall dramatically.
Further, and probably more importantly, young people are told to go to college any way they can, and more and more of them are doing so while taking on $50,000, $100,000 or more in debt.
That's a house payment all on its own, and incidentally, very few people can afford two house payments. Since they already have one, they can't also afford a house.
How did this all happen? Simple, and the Real Estate lending industry (and housing industry in general) was a mighty contributor to it. By pushing the buying of things on credit and the expansion of credit generally at rates that grossly exceed actual economic expansion in the economy the price of things goes up. When this is directed to "assets" you have a problem.
Then you support the destruction of quality blue-collar jobs to go along with the destruction of blue-collar-priced homes and what do you expect to happen?
Due to technology the price of things over time -- including houses -- should go down. They go up because you are continually pulling forward demand with ever-larger amounts of credit that exceed the growth in economic output.
But this game is not an infinite process and cannot go on forever. The wall was hit in 2008 and has not materially come off at all. Indeed, if you look at the Fed Z1 the only place where credit has materially contracted is in "financial products" -- that is, loans between financial institutions -- and all of that and more was absorbed by new FEDERAL borrowing to hand out cash to BlowMeBama's favorite friends, never mind the outright fraud of "budget contraction" that is in fact still an expansion that Rethuglicans run year after year and you lap it up like Pavlov's dog.
In other words systemic leverage has hardly moved since 2008 and all of that has been backloaded on those least able to pay -- including young people. Then you add onto that skyrocketing property taxes (nearly a clean double in the last 10 years in some areas of the Midwest!) and a labor:employment ratio that hasn't moved a millimeter since 2009 and you have a toxic brew under which far fewer people can buy a house.
The comments to the article are largely recognizing the problem, which is good.
That this crap got posted in the first place tells you everything you need to know about the duplicity in the so-called "Real Estate" business.
Community bankers and mortgage lenders across the country are viewing with skepticism President Obama's call to do away with government-backed mortgage giants Fannie Mae and Freddie Mac, as the president unveiled his latest housing plan during a speech in Phoenix.
The president, after touring a construction site in Arizona, endorsed the call by many in Congress to phase out Fannie and Freddie, while still calling for 30-year mortgages to be available to borrowers. The government-backed mortgage giants were caught in the housing crisis which ended in a $187 billion taxpayer bailout.
We already do this, by the way. It's called the FHA, more or less.
Here's the real issue -- Fannie and everything associated with it came about as a rescue program during The Depression. It became ingrained into our "housing" system -- the premise that one could use unreasonable amounts of leverage to "buy" a house.
You still see it today. I just yesterday say someone pop up on Facebook who I am lightly-acquainted with saying "we're homeowners!" -- having just closed. No, they're not homeowners. They put only a tiny fraction of the purchase price down on the table. The bank owns the house, and since Fannie and Freddie were almost-certainly involved, either directly or indirectly, the government owns the house!
You in fact don't even own the house when you're done paying it off because we have allowed that same fiction to permeate municipal finance through property taxes. Try not paying them for a couple of years and see how long "your" house remains in your possession.
Houses should be priced at roughly 1x annual incomes for a given area, and thus able to be financed in a five year or so timeframe. This roughly corresponds with the average holding period, which is about seven years.
That would make sense. In a market economy that's approximately what the market would support, because that would roughly align with how long people tend to hold onto a given property. Some more, some less, but that would be about the right time. The amount willing to be lent would vary with the total carrying cost as would the interest rate, which means that in a high property tax place (e.g. Chicago) both the amount lent and interest rate would be penalized compared to, say, rural Tennessee. This would serve as a powerful check on state, county and local property taxes -- jack 'em up and what people can buy goes down. Equilibrium is determined by the marketplace.
What Obama wants to see is a perpetuation of the fantasy that exponents don't exist. That fantasy got us in trouble in 2007, just as it did in 1999, 1987 and before. But the real issue is this one:
This is a 30 year secular trend and it's ending.
That is, the secular trend toward lower interest rates across the board.
Notice that every significant economic calamity since 1980 -- 1987, the mid-1990s recession and debt problems, 2000, 2007 -- all came about as the consequence of excessive leverage when the secular downtrend suffered a cyclical reversal.
There is a 100% correlation folks.
Now this secular trend is changing. It is changing because it must. It will either flatten out (less likely) or reverse, and as a consequence all of those economic behaviors, whether by governments, companies or individuals that have been profitable into a secular decline in rates will lose money.
Every one of them.
Obama either doesn't understand this or doesn't give a damn. I suspect the truth is that there are elements of both; he almost-certainly doesn't fully understand it, and he most-certainly has been co-opted by glib-talkers who are rooted in denial of this reality.
But you don't have to be.
And if you want to financially survive and prosper in the next couple of decades, you damn well better not be.
I know I've talked about this before, but let's rehash, eh?
Let's say you managed to bottom-tick the rate on a 30 year mortgage at about 3.5% a few months ago.
Let's further say that you were buying a $200,000 house.
Your P&I (Principle and Interest) on that loan was $895.48 per month.
Now that same loan is about 4.5% -- up roughly 100 basis points in the last couple months, or more than 25% higher.
How much house does your $895.48 buy?
The imputed loss of value in every home in the nation is 11.3%.
The reality is that the support for home prices over the last couple of years has been ridiculous. That alleged "value" never existed. Price diverged from value due to the machinations of banks and The Fed in their puerile (and ultimately futile) attempt to force a continuation of this trend:
Realize that value, when it comes to a home, is found in the number of beds, bathrooms and facilities (e.g. to cook, to wash clothes, etc) that the home provides. That value is invariant with interest rates; your home doesn't suddenly become more (or less) useful in terms of the number of people it will house, the cuisine it makes easy (or difficult) to cook, or the view it has (or doesn't) of the water, of mountain ranges, etc. Nor does the number of chickens or goats it will support, or the number of bushels of corn, quarts of strawberries or other crops change with the cost of financing.
If you are under contract now to buy a house you may feel rather smug having "locked" your rate before the most-recent spike. You shouldn't be.
Your lender will probably try every trick in the book to repudiate the "deal" they offered you. You will probably fight like a rabid dog to force them to close.
You ought to think long and hard about it before you do, because you're paying $200,000 for a house that in today's market has a price of $177,395.72 when sold to someone of identical capacity and desire to borrow -- that is, to service the mortgage -- as you.
I have repeatedly said that I will know when we have returned to a rational financial marketplace and something resembling a free and reasonable market when a house is looked at a durable capital good, not an "investment" or "store of value." When there is no more talk about how people count on their house as a retirement asset to be bled down as they live out their years and when "reverse mortgages" are no longer something that any financial institution would consider offering. In short, when you buy a house because you want a place to hang your hat, sleep, shower and **** -- and are perfectly comfortable with the fact that it depreciates over time, when real estate taxes are a minuscule portion of the current value (or entirely absent) and where the only people looking at Real Estate as a means of "making money" are those who buy property to rent it out and it cash-flows against all operating costs, including maintenance, upkeep, taxes and funding, leaving a black number at the bottom of the cash flow statement.
We're a hell of a long way from there but we're going there folks, and if you've bought into the premise that we're not -- you're wrong. If you've levered up into that premise, buying into the crap sold you by Bernanke and the "housing" folks this is you:
Lenders and consumer advocates — rarely on the same side of the issue — are now cautioning against down payment requirements. They argue that such restrictions could limit lending, and prevent lower-income borrowers from buying homes. They also contend that the new mortgage rules put in place this year will do enough to limit foreclosures, making down payment requirements somewhat superfluous.
The arguments seem to run contrary to long-standing beliefs about homeownership. For decades, experts have emphasized the need for a sizable down payment — a rule of thumb being 20 percent — on the premise that borrowers with a sizable chunk of equity in a home are less likely to walk away when things get bad.
20% down payments have less to do with that aspect of things than they do with the basic principle of financed purchase -- the amount of leverage that the buying is carrying in the transaction.
With a 20% down payment the buyer is carrying 5:1 leverage. This is still substantially dangerous to the buyer, but it is probably manageable, provided that the income and assets of the purchaser prove up after diligent inquiry and there are no hidden liabilities that are being actively concealed.
With 10% down the buyer is carrying 10:1 leverage, or the amount that commercial banks are allowed -- in theory -- to carry. But this is much more dangerous than a bank, because the bank carries this leverage across thousands if not hundreds of thousands of individual transactions. That is, the bank has little or not "specific transaction risk" -- the risk that the one transaction in question will go bad and blow you up. A buyer, on the other hand, is inherently exposed to this specific transaction risk and this makes such a loan very dangerous.
How about 3% down? Now you're levered at 33:1, which I note is where Bear Stears and Lehman were just before they blew up. That's a literal ticking time bomb.
20% down isn't a panacea. 5:1 is still too much leverage, in my opinion, unless coupled with extremely-strict income:debt ratio requirements. The common 28/36 ratios (36% back end and 28% PITI front end) against gross income is dangerous as well if there is the potential requirement or desire to take on any more debt post-closing. Specifically, if that ratio does not already include leased or time-financed vehicles for all adults responsible for the note then the premise is potentially bogus and the ratios will get violated as soon as a car needs to be replaced (or added.) One reason for this danger is that these figures are pre-tax but we all must pay taxes. Worse, the danger gets greater the further up the income scale you go (as your effective tax rate increases) until you break into the "upper crust", which for many high-cost areas starts in the $200k+ income range. What would be better would be to keep 28/36 but make it after-tax; this would make the ratio income-insensitive and be a bit more conservative at the lower end but materially more-so for middle-income participants (where the ratios can bite you the hardest despite declaring the loan "safe.")
The other benefit as mentioned in the article is that forcing a 20% down payment to be considered a "safe" mortgage demonstrates one thing that is very important to stable home ownership -- the ability to save economic surplus rather than immediately spend it. Since homeownership is inherently an act that comes with material and ongoing but sporadic maintenance expenses for which one should maintain a fund to cover them, demonstrating this capability is a big deal. The idea that one may rely on the always-present ability to borrow when (not if!) the furnace takes a crap and requires replacement in February is both unwise and potentially catastrophic for both the borrower and the lender, since a home without heat in such conditions is likely to have the pipes freeze doing serious damage to the secured asset.
It is not surprising, of course, that the lending and housing industries are pushing back on the imposition of these requirements. After all, infinite leverage is great for prices and profits, so long as it lasts.
But it is also inherently unstable and if 2008 taught us anything it should have taught us that while it's perfectly ok for individuals to take such risks when those individuals and firms seek to or actually do transfer that risk to the public as a whole via taxpayer bailouts or subsidies we must, as a body politic refuse.
20% down, 28/36 after-tax ratios against verified income folks for those who want to claim "qualified and thus safe" mortgages, with those verifying the claims subject to both civil and criminal fraud prosecution for any material misstatement of fact.
Anything less is a joke and you will get the bill for allowing it though.
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