Here we go again.
With a very questionable future for an economy that has just been "put on hold" for 3 months globally, mortgage interest rates are back to all time lows. The Fed has ramped up, or lets say tripled down on its bailout of the "Financial" Industry. Now we all know that in the midst of what was supposed to be the longest expansion in history accompanied with extraordinarily low unemployment (well officially) that the Fed was completely and utterly unable to "normalize" interest rates or it's balance sheet as witnessed in September of 2019. The policies adopted at that time created the perfect climate for the stock market to rocket to record highs by early 2020. After the Fed decided to perpetuate the bubble in the Private Equity / Hedge Fund / Shadow Banking world that month after already admitting it could no longer raise interest rates months before we got Part 1 of a pro-cyclical bailout driven to prop up over levered speculators. The COVID-19 shutdown BS perpetuated by the squeamish global elites and billionaires the world over created the perfect storm for Part 2 (or you could say Part X since this has been going on for over a decade now).
The current political leadership followed through with their promise to the corporate elites to dramatically reduce taxes (part of the reason the idiot was tolerated I am sure) during what was supposed to be a "Great Recovery" in the economy, including the lowest unemployment on record, a 10 year bull stock market, corporate profits that were setting records and buybacks that were setting records instead of using the economic growth cycle to re-balance the finances of the public coffers. Instead the decision was made to follow through with political promises and dramatically increase the public debt during an economic growth period that brought "peacetime debt levels" close to those only comparable to war time numbers. To top it all off, massive stimulus was passed by congress and more was promised, infrastructure and the like. Meanwhile the asset bubble created in the Financial Industry had become completely unsustainable. The search for "yield" to pad the pockets of all those folks who already control over 80% of the global "wealth" had resulted in leverage not seen since just before the crash of 2008-9.
So the follow up on the "Participants will Emerge" theme was reawakened when I decided, in this stupid interest rate environment, to look into refinancing a mortgage with 75% equity simply to lock in a rate for 15 years to make sure when the fiat system implodes I'll have a fixed rate on my then worthless mortgage. NO PARTICIPANTS EMERGED. That's right. An online search through one of the largest aggregators of mortgage companies with those who desire a mortgage only resulted in one bank willing to do a refinance. When I finally was matched by some call center person to a "mortgage lender representative", who incidentally acted like this was her first ever deal, we did not get past some stupid questions about terms and whether I knew what my "credit score" was, which I could give a rats ass about. When I told her "I pay my bills so I am sure it's fine lets just move forward," she hung up! The second search for a VA option resulted in one lender as well who when I spoke to her on the phone, as soon as I said it was a refinance, she said, "We are not doing refinances right now". I was like, "OK why?" Well I don't have to tell you why, you likely already know. The banks are up to their eyeballs dealing with people who DON'T WANT TO PAY THEIR MORTGAGE RIGHT NOW (which she would not say) but she did say "due to the drop in interest rates..." Well I know what that means.
Nobody in their right mind will refinance a house at 3% for 15 years when the economy was just sent off a cliff and nobody knows if it will recover, when, how strongly and BTW we have millions of calls from people who DON'T WANT TO PAY THEIR MORTGAGE RIGHT NOW.
OK so there you have it. No Participants have yet emerged after 12 years Mr Federal Reserve Chairman and Treasury Secretary. No Participants willing to buy mortgages at your artificially low rates outside of YOU and the federally sanctioned, technically insolvent, Fannie and Freddy.
At what point do you think "Participants Will Emerge" now?
Showing posts with label mortgage interest rates. Show all posts
Showing posts with label mortgage interest rates. Show all posts
Wednesday, June 10, 2020
Saturday, August 27, 2016
Are Americans Already Paying Dearly for Brexit?
I was reading an article today about "Shoe-Leather Costs", a somewhat esoteric paper related to money demand when I realized that of all of the formulas and assumptions related to interest rates, inflation, income and behavior related to how money is used, nothing addressed debt or more specifically, the cost of debt born by society at large.
This is starting to bug me as for some unknown reason, the more literature and articles I read about monetary policy and economic growth and inflation etc, not finding the cost of debt factored into the myriad of formulas out there trying to analyze economic realities leads me to believe the theories are broken. Economists focus on interest rates that determine the "cost of money" in the financial sector and "interest" paid to savers but not to the larger and more impactful number, "debt costs", in their figures. In fact, contrary to one's intuition, economist and financial folks cheer when consumer debt is growing at a "healthy clip".
Well excuse me, but at what point do these folks begin to understand, that nearly all wealth degradation and a huge amount of income stagnation over the last 40 years can be directly attributed to the ballooning of consumer and public sector debt. If the average American household now holds some $15k in credit card debt (not to mention Auto $28k, Student $50k, Mortgage $170k) with an average annual interest rate of $15% this means the average household is paying nearly $200 per month in interest on credit card debt alone. Now, what is the average interest earned on savings? How about less then 1/2 of one percent, or if you are lucky and have enough money to sock away, 1%.
Just imagine if old values of saving money and buying a modest home while borrowing as little as possible at the lowest interest rate possible, still held. What if the average household would have socked away $3000 in 1976 (the value of 15k 2016 dollars) and added the equivalent of $200 a month (about $50 in 1976) to this amount each month and continued to do so at an inflation adjust rate till today when they would be putting in $200 a month and the interest earned on their original $3000 kept up with inflation (yes interest rates on savings accounts were nearly 7% in 1976 while inflation was around 6%). Where would this household be today? I did some crude math, adjusting the interest and contributions every 5 years for inflation and interest rates and found they would have somewhere around $185,000 in the bank. This compares to an average net worth (not including mortgages) of about $45k for Americans age 55-64.
Mind you, I only did this fun little exercise on this lazy hot Saturday afternoon in Washington based on the $15k in credit card debt and the lost "savings" due to interest payments. Why don't you have fun doing the math for auto loans and student debt, which is ballooned astronomically, and why? Because the parents of the children reaching college age HAVE NO MONEY cause they paid it all out in interest their entire working lives! (NOTE: Average overall household interest costs totals over $6500/year.)
I could go on, but all this discussion misses the title and point of my writing today. For whatever reason (easy manipulation of the numbers over a 20 year or so period until 2014 when the ICE Benchmark Administration (IBA) took over the Administration of LIBOR?), many American lending institutions switched Mortgage loan interest from using US interest rates, ie One year treasury or more recently one year constant maturity rates or CMT as a base rate, to using London Inter-Bank Offer Rates or LIBOR plus their customary 2.25% or whatever.
This little move means that millions of American mortgages are tied to in interest rate set in London, the capital of a nation that just voted to exit the European Union which could, though has not thus far, create volatility and instability in London rates. Why is this important? Well, the one year LIBOR rate now stands at 1.52% vs .85% one year ago. Meanwhile the one year CMT or Constant Maturity Rate in the US is about .58%, the 11th District Cost of Funds rate is about .68% and the European Interbank Offer Rate is -.05% (yep that's negative). So Americans unlucky enough to have the LIBOR rate are going to see base mortgage rates that nearly double last years rate at this time, and average 1% more then comparable US mortgage lending rates.
The change in LIBOR alone, given the historical average of 15% of outstanding mortgages being adjustable rate would result in Americans paying out about $600 million more per month or $7.2 billion per year in additional mortgage interest. If they have credit cards and student loans also based on LIBOR this number will be significantly higher. So you have a kind of global financial tax that the Fed can do nothing about.
So why is LIBOR so heavily used in the US today? My guess is during the go-go days of using mortgages as the underlying "asset" for the myriad of financial "products" that were used to gamble with, the money borrowed to play was global in nature. Hedge funds, Insurance companies, Private Equity, Financial institutions etc. from Europe, London, Hong Kong, the US and every "off shore" domicile imaginable all played with money borrowed and lent at international interest rates so why not base the underlying asset's interest rates on the same global lending rate paid by the gamblers... and so now you have it.
This is starting to bug me as for some unknown reason, the more literature and articles I read about monetary policy and economic growth and inflation etc, not finding the cost of debt factored into the myriad of formulas out there trying to analyze economic realities leads me to believe the theories are broken. Economists focus on interest rates that determine the "cost of money" in the financial sector and "interest" paid to savers but not to the larger and more impactful number, "debt costs", in their figures. In fact, contrary to one's intuition, economist and financial folks cheer when consumer debt is growing at a "healthy clip".
Well excuse me, but at what point do these folks begin to understand, that nearly all wealth degradation and a huge amount of income stagnation over the last 40 years can be directly attributed to the ballooning of consumer and public sector debt. If the average American household now holds some $15k in credit card debt (not to mention Auto $28k, Student $50k, Mortgage $170k) with an average annual interest rate of $15% this means the average household is paying nearly $200 per month in interest on credit card debt alone. Now, what is the average interest earned on savings? How about less then 1/2 of one percent, or if you are lucky and have enough money to sock away, 1%.
Just imagine if old values of saving money and buying a modest home while borrowing as little as possible at the lowest interest rate possible, still held. What if the average household would have socked away $3000 in 1976 (the value of 15k 2016 dollars) and added the equivalent of $200 a month (about $50 in 1976) to this amount each month and continued to do so at an inflation adjust rate till today when they would be putting in $200 a month and the interest earned on their original $3000 kept up with inflation (yes interest rates on savings accounts were nearly 7% in 1976 while inflation was around 6%). Where would this household be today? I did some crude math, adjusting the interest and contributions every 5 years for inflation and interest rates and found they would have somewhere around $185,000 in the bank. This compares to an average net worth (not including mortgages) of about $45k for Americans age 55-64.
Mind you, I only did this fun little exercise on this lazy hot Saturday afternoon in Washington based on the $15k in credit card debt and the lost "savings" due to interest payments. Why don't you have fun doing the math for auto loans and student debt, which is ballooned astronomically, and why? Because the parents of the children reaching college age HAVE NO MONEY cause they paid it all out in interest their entire working lives! (NOTE: Average overall household interest costs totals over $6500/year.)
I could go on, but all this discussion misses the title and point of my writing today. For whatever reason (easy manipulation of the numbers over a 20 year or so period until 2014 when the ICE Benchmark Administration (IBA) took over the Administration of LIBOR?), many American lending institutions switched Mortgage loan interest from using US interest rates, ie One year treasury or more recently one year constant maturity rates or CMT as a base rate, to using London Inter-Bank Offer Rates or LIBOR plus their customary 2.25% or whatever.
This little move means that millions of American mortgages are tied to in interest rate set in London, the capital of a nation that just voted to exit the European Union which could, though has not thus far, create volatility and instability in London rates. Why is this important? Well, the one year LIBOR rate now stands at 1.52% vs .85% one year ago. Meanwhile the one year CMT or Constant Maturity Rate in the US is about .58%, the 11th District Cost of Funds rate is about .68% and the European Interbank Offer Rate is -.05% (yep that's negative). So Americans unlucky enough to have the LIBOR rate are going to see base mortgage rates that nearly double last years rate at this time, and average 1% more then comparable US mortgage lending rates.
The change in LIBOR alone, given the historical average of 15% of outstanding mortgages being adjustable rate would result in Americans paying out about $600 million more per month or $7.2 billion per year in additional mortgage interest. If they have credit cards and student loans also based on LIBOR this number will be significantly higher. So you have a kind of global financial tax that the Fed can do nothing about.
So why is LIBOR so heavily used in the US today? My guess is during the go-go days of using mortgages as the underlying "asset" for the myriad of financial "products" that were used to gamble with, the money borrowed to play was global in nature. Hedge funds, Insurance companies, Private Equity, Financial institutions etc. from Europe, London, Hong Kong, the US and every "off shore" domicile imaginable all played with money borrowed and lent at international interest rates so why not base the underlying asset's interest rates on the same global lending rate paid by the gamblers... and so now you have it.
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