2008-11-11

Brilliant! CitiMortgage Coming Through!

Recently I have been eluding to what I think will recover the economy the quickest both here and on thecornerofficeblog run by my friend Grant. Basically, figure out a way to keep as many people that can into homes, without letting them off the hook for payments.
The idea is simple, people that can afford to stay in there home can afford to buy other stuff. Thus ensuring the great capitalist society that is America.

Math will tell you that as long as a homeowner stays in a home for some given amount of time, then the interest on that loan will ensure a bank makes a profit. Most times it means the bank will make a big profit if that homeowner remains in a house 8+years or more. Well I have recently thought that two strategies to keep homeowners in their house would be to A)adjust the interest rate to a level that they could afford and fix it for 30-years or B)extend the mortgage to a 40-year fixed and adjust the rate appropriately. I am not talking about handouts but something appropriate for that homeowner. Don't ask me to define what determines what, I don't know that answer, but something reasonable should be able to be agreed upon. I believe this will still shake out the people who can't afford a home period, but maybe saving some people on the fringe and those who may have recently lost their job. Like arm floaties for those getting tired of swimming.

I know the argument against doing anything like this was that people should have known better and if they couldn't afford the home that they were buying then shame on them. That is a good argument, but I would argue as well that many of these people probably thought if I can't afford this when the my 3 to 5 year ARM ends, then I will just refinance like this banking guy is telling me or just sell the house. Both of those "fail-safes" have, well, failed. Now people are upside down, banks aren't collecting any money, and foreclosure is abound. If you could keep people in homes, home values could stabilize, governments property tax funding could stabilize, and maybe the taxes we all see on the horizon could be greatly reduced.


Now I originally thought that the government would be the only entity that may put together a plan like I was speaking about, but to me real capitalist hope is on the horizon. Citi (the nation's largest or second largest bank I can't remember) announced that it was going to put together a team of 600 specialists to help their struggling customers figure out a payment that they can afford. Although it may be too late for our economy and many foreclosed homeowners, but the lender is finally coming through with the promise to refinance, albeit not in the way they were originally planning.

To me, a big signal of the economy starting to turn around would be several more of the big banks following suit without government involvement or encouragement. Until then I think you will not see an end to this economic struggle until floor opens up and a lot of otherwise good, smart decision people have lost their jobs along with all of the idiots. It is a downward cycle in my mind that will continue until something is done.

The downward cycle:

1. People can’t afford their home, bills, etc.

2. People stop spending on anything that isn’t necessary.

3. All those companies making the non-essentials suffer greatly, because now there aren’t any orders.

4. Those companies layoff people, close plants, and consolidate.

5. Now more people can’t afford their home.

6. Repeat 2-5 over and over.

All that is occurring right now, and we all are going to be affected. I don't know about the rest of the world but I want the costs to me, the working population to be minimalized, before my life or my job (again) to be affected.

4 comments:

MJ @ Dyslexic Research said...

Holy Crap! I guess ask and ye shall receive.

http://biz.yahoo.com/ap/081111/meltdown_mortgages.html

Up next lawsuits from people who missed out on this...

hayesatlbch-visualdyslexiasolution said...

Home values historically are based on the cost of the mortgage costs being about 14 times( for the year) what you could rent that house for.

After all, many of the people who want to buy homes are renters.

Others are people who buy home as a long term investment.

And others are homeowners who want or need to move.

The speculators and flippers are the ones who distorted the market and got everyone believing prices could keep going up forever. Forget about them. They are now gone.

The difference between paying 12 months rent or buying a mortgage for 14 times the monthly rent has been the premium that people has felt is fair and economically reasonable.

Renters moving up to be homeowners know that their payment will be fixed and that after a few years their mortgage is basically the same price they would be paying for rent In future years they will be paying less in their mortgage than if they stayed renting.

Long term investors are in a similar position. They rent out the house for less than the mortgage for a few years and then rents rise to the amount of the mortgage at which the renter is basically making the payments while the owner builds equity on his investment.

When home mortgages rose to about 22 times the monthly rent(as they did) it no longer made sense to buy.

Even if the renter looking to buy could afford the mortgage payment with its risks. He would be looking at paying a premium over rent for 20-25 years before rents caught up to his mortgage costs.
He knew he could save the difference and come out financially ahead.

The long term investor is in the same position. There is no logic in subsidizing the payments for 20 years with all the trouble of being a landlord for that little return. It also makes the plan of after one house is paying its way being able to start again with another house impossible.

The cost of a mortgage will have to fall until it is again 14 times monthly rent for home prices to stabilize and start people buying homes again.

There are 2 ways that can happen.
Falling interest rates that lower the cost of the mortgage or lowering the sales price of the home.

Somebody has to feel the pain and I don't think it should be the taxpayer or their children.

I am also sure that there is a limit on how low mortgage interest rates could be before someone figures out how to distort that fact into a money making business that puts our money into their pockets.

MJ @ Dyslexic Research said...

"The cost of a mortgage will have to fall until it is again 14 times monthly rent for home prices to stabilize and start people buying homes again.

There are 2 ways that can happen.
Falling interest rates that lower the cost of the mortgage or lowering the sales price of the home.

Somebody has to feel the pain and I don't think it should be the taxpayer or their children."

Completely agree...Thanks for you input!

Grant said...

I agree with the notion that mortgages can be 'reworked' to help keep people in their home. And let's face it, the banks want to keep the monthly payments coming in, even if they're not in full.

I think that if you fix the rate at a reasonable level, and spread the loan over 40 years, or heck, even 50 years, that will solve the long term problem.

The problem is that, long term, there has to be something in it for the banks. There is a cost to lending out money, and if they're not bringing in what it costs to lend the money, the banks lose anyway. Just like any other business would.

Additionally, you'll have people that can't make the payments no matter how you restructure the loan, and I think this is fueling the current economic downturn. At some point, those people will unload their house, find a place to rent, and we'll eventually reset to the previous standards of qualifying for a mortgage.

In the end we'll all be alright, but there will sure be a price to pay in the near future.