The re-leveraging of the US home owner has begun. It was just reported on CNBC that part of CITI’s plan was to give temporary teaser rates of 1-2% to ‘help’ borrowers avoid foreclosure. I have reported in the past that other banks are opting for this route because it costs them far less than a permanent modification involving principal reduction. But ultimately, this route will lead to lost decades in housing.
Its sad when the only way to ‘save’ housing and get borrowers out of default is keep them terribly leveraged by cutting their rates to 1-2%. Exotic loans with teaser rates is what got us here in the first place!
What is also sad is 1-2% is about the rate needed to compete with the exotic loans given to everyone in the past 6 years. This emphasizes how much leverage is in the housing system. This really does nothing to save housing it just keeps housing propped by allowing the borrowers to stay terribly leveraged.
This does nothing to clear the market, only push the problem out. This does nothing to help the gross amount of negative equity around the nation, which is the primary reason for loan default across all paper grades. In CA, 60% of all mortgage holders are upside down in their property. Due to this the all important move-up buyer is non-existent making for a housing market in which over 50% of all sales come from the foreclosure stock.
Programs such as this also promote bad behavior. I can tell you right now, I want my 1% loan. If it takes missing one mortgage payment to qualify, that is an option to the lack of financing available. I have a lot of equity in my home and with the lack of any cash-out loan programs, a 1% loan would essentially allow me to spend the savings on what I would have done with the cash-out from a new loan.
To those of you interested in one of these boiler-plate modifications, be careful. It is my opinion that a mortgage modification must be a market-rate fixed rate loan at a level you can afford to pay with 28/36% debt-to-income ratios.
This means principal balance reductions are a must. If not, you are just renting your home because housing prices will not ‘come back’ any decade soon. That is of course, they bring back all of the exotic loan programs that allowed a $80k a year income buy a $800k home or wages rise 300%.
For those of you interested in mortgage modifications, please read the reports below. They will tell you all you need to know. –Best Mr Mortgage
Mr Mortgage on Mortgage Modifications
- NO MORE MORTGAGE PAYMENTS SOON – Get Ready to Default! (62)
Posted on November 4, 2008 5:20 PM
- Mortgage Modifications Go Mainstream – BE CAREFUL! (21)
Posted on November 3, 2008 2:20 PM
- Time to Get Your Bailout…The ‘Gimme Mine Coalition’ (21)
Posted on October 7, 2008 5:46 PM
Mr Mortgage – Recent Home Sales Reports
- NO SPIN Sept New Home Sales Report – Sales LOWER (29)
Posted on October 27, 2008 1:46 PM
- NO SPIN – Existing Home Sales DOWN 9.6% From Aug…Not Good (49)
Posted on October 24, 2008 10:29 AM