| Author | Message | ||
     Mohideen Ibramsha |
For a number of years the housing industry was the prop of the economy. Innovative finance schemes were introduced to widen the 'eligible group' the group of people who could get a mortgage. One popular scheme was to have interest only for 5 or 10 years after which the mortgage would behave as any other, collecting interest and capital. The finance company has the option to increase the rate of interest when the 'interest only' period ends. In some such cases, the hike could be 6%. Quite a few mortgages start with 7% or more as 'interest only.' Thus when the 'interest only' loan switches to normal loan the interest could become 13%. Such a switch causes the monthly payments to go beyond the capacity of the purchaser. An example might help. Loan amount: $350,000 Interest only period: 5 years Total period: 30 years Monthly payment during the first 5 years: $2,041.67 To qualify, the income should be $5,104.18 or more per month so that the mortgage payment is just 40% of the total monthly income. For a prime loan, there must be documentary proof that the loanee indeed earns more than $5,104.18 or more per month. Such persons are not enough to sell the homes to. So we expand the customer base by relaxing the documentary proof. The lender carries the risk and the loan is sanctioned. For our discussion, the owners of the new home are motivated to retain their home. Their income increases by 3% per annum and thus they gain 15% in their income during the 5 year grace period. Just after 5 years, the loan is $350,000; the period is 25; and the potential interest rate is 13%, giving a monthly rate of $3,947.42 which is 193.34% of the earlier monthly rate of $2,041.67. Obviously a hike of 93% could not be met by a 15% hike in the income of the mortgagee. The bank loses through foreclosure. It would be better to induce the owner to stay and extend the interest only period by giving a one year extension of interest only with a hike of the interest by 0.25% retaining the 20 year normal mortgage period intact. Further the maximum interest rate remains at 13% irrespective of the extensions. Now the monthly payment is $2,114.58 which is just 3.57% more than the previous rate of $2,041.67 which is affordable for the owner. We have proposed a flexible increase in interest rate of just 0.25% for every year of extension. Even if the owner does not qualify ever for a prime loan, such affordable increases in the monthly payments help the owner to stay and meet the monthly payments. The bank retains its benefit by avoiding foreclosures. The stock holders do not panic as it happened recently. http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=FT&Date=2007 0314&ID=6606777 === Shares in Goldman Sachs closed 1.8 per cent lower, reversing a strong start after it reported a record $3.2bn in earnings for the quarter ending February 23. ... Lehman Brothers fell 5.9 per cent, while Bear Stearns slumped 6.65 per cent ahead of their first-quarter reports due today and tomorrow, respectively. === We hope the regulatory authorities would permit such a flexible policy without a new closing as the parties remain the same. | ||
| Mohideen Ibramsha |
http://realtytimes.com/rtnews/rtapages/20070314_naroptimistic.htm === Meanwhile, the bad news drove up bond prices, lowering yields, to which long-term lending is tied. That means that mortgage interests could lower further still, providing incentive for homebuyers to buy and ARM holders to refinance. === The above seems to be a 'market correction.' Does it imply the Fed need not intervene and permit a change in policy as suggested above? | ||
| Mohideen Ibramsha |
Would 'market correction' stabilize the economy? Refinancing because the interest rate is coming down looks attractive on the surface but would not help the economy. An investor moves out of stock when the ROI from that investment is less than another investment. Refinancing is bound to result in either of the two following: a) The loan gets transferred to another lender and thus this lender loses the business and takes a reduction in profit. b) The loan attracts a lower interest and thus the gain to the lender is reduced again resulting in reduced profits. Either way the lending industry suffers with reduced profitability. Thus the investor is bound to move out of the lending market. If the investors move into long term deposits, their rates would fall, resulting in lower mortgage rates further reducing the profitability of the housing sector. It is felt that the suggestion to extend the interest only period by a year with increase of 0.25% in interest rate per year of such extension would permit many subprime home owners to continue to own homes. Once the interest becomes the maximum permissible limit, the interest-only loan could be converted to a normal interest plus principal loan and thus the housing market would not lose finances. It should be noted that giving the option to stay with the same lender with marginal enhancement in interest rate does not remove the refinancing option. Many subprime mortgage home owners might not qualify for prime mortgages or even subprime mortgages with strict requirements. Thus not giving a flexible option would result in avoidable foreclosures. | ||
| Ivan |
It's not as bad as it looks... in my opinion only. I can't comment on these issues of stock markets and economy in great detail, since in my professional position I may be subjected to 'privileged' information, so it might have legal compliance consequences. But I can answer some of Mohideen's above in a general way. RE the R.E. article above: The level of 'late payments' are only about 5%, which is not totally out of line with normality; the late payments on sub-prime mortgages is higher at 13-14%. but not much higher than normalcy of about 12%. And the level of foreclosures is still very low, at about 1/2 of a percent. Foreclosures in R.E. news are not main headlines for now, certainly not on the West coast where I am. Other demographic and economic pressures on lenders and real estate markets have a much higher corrolation to what actually happens to price than the sub-prime market's negative perceptions. In effect, this may be a 'manufactured' panic out of not too relevant news, with some analysts panicking their banks into cutting funding for this market group of mortgage lending. The stock market might have already been spooked by the China correction, and so this news spooked it some more. Otherwise, not much has changed, in my opinion. The bank analysts should calm down, and review their future lending practices in a calm and measured manner, rather than irresponsibly causing market panic. On the other hand, I think bank lending such as aggressive credit card campaigns, and mortgage bank lending with aggressive campaigns to the sub-prime market should be better monitored with legal compliance. Accounting should be reviewed, since there is an opinion that current accountring practices actually encourage this kind of aggressive lending by the banks. Also, mortages that actually eat up equity in the property, rather than pay down principle, should be stopped; you cannot create a 'breeder' mortgage that eats into its principle to cause it to grow larger with each payment, so the borrower is in essence going deeper into debt; it then becomes a continuous 'equity loan' that never has prospects of being paid off, except with the hope that someday in the future the house will be sold at a higher price. They say 'hope is not a strategy', and in the sub-prime mortgage market it is more like a recipe for future disaster. So better stop those very aggressive 'breeder' indebtedness, or face the unhappy consequences down the line. Ivan | ||
| Mohideen Ibramsha |
So better stop those very aggressive 'breeder' indebtedness, or face the unhappy consequences down the line. Posted on Saturday, March 17, 2007 - 11:52 am: Ivan Ivan your post appeared at the right moment. I was leaning to the opinion that a new loan scheme on the following lines might be a good one: === 1. We grant subprime loan to those without documents with the lender taking the risk. 2. The first period of 'interest only' remains as 5 or 10 years as of now. 3. Instead of mortgages of 40 and 50 years we restrict the market to 30-year mortgages only. (The lack of benefit of a 40 and 50 year loan are discussed below.) 4. After the initial period of 'interest only' for every year of 'interest-only extension' the interest increases by 0.25%. Since the maximum increase is just 6%, these increases cannot continue for more than 24 years. 5. By such built-in slow escalation, the length of the mortgage is held within 54 years at the maximum. 6. Instead of the current practice of restarting the loan - for a period of 30 years on refinance - we allow refinance to reduce the interest rate corresponding to the reduction in the bond rates retaining the time limits on the mortgage. That is a mortgage granted during 2002 with a 5/25 pattern with maturity on 2032 would still retain the maturity date of 2032 but would gain benefit due to reduced interest rate on refinancing. This is justifiable as the lender pays less due to the rate reduction on the bonds and thus he / she passes on the benefit to the home owner. This is better than the current practice of restarting the start date every time there is refinance as under the current scheme - theoretically - a mortgage could run forever. === Let us consider the rates for 15, 30, and 40 year mortgages. From http://www.mortgagenewsdaily.com/5162006_50_Year_Mortgage.asp === The 15-year fixed rate mortgage is currently priced at 6.17 percent. ... The 30-year fixed rate mortgage this week carries a rate of 6.58 percent. ... There are currently 41 basis points separating the 15-year and 30-year mortgages (word changed to overcome objection by server) and we read that there is a differential of around 25 basis points between a 30 and 40 year-fixed loan. === From the above we conclude that a) Interest rate is 6.17% for a 15 year FRM. b) It is 6.58% for a 30 year FRM. c) It is expected to be 6.83% for a 40 year FRM. At the present time there is possibly no 50-year FRM. Let us hypothesize that the interest rate for a 50-year FRM would be 15 points more than the 40 year FRM at 6.98%. How much would be the monthly payment for a $350,000 loan? For a 15-year FRM the monthly payment is $2,985.74; for a 30-year FRM it is $2,230.68; for a 40-year FRM it is $2,131.93; and for the hypothetical 50-year FRM it is $2,100.55 a month. The corresponding annual incomes are: $89,572.20; $66,920.40; $63,957.90; and $63,016.50. We could assume that the subprime loan is given to families with an annual income of less than $63,957.90 for a home of $350,000 by waiving the documentation and the lender carrying the risk. One lender is offering ARM at 5.875 with a 5-year interest only. Let us assume that the cap is at 12%. At the start the monthly payment is $1,713.54. At the start of the 6th year this loan would have a monthly payment of $3,686.28 which is more than double. This client accepted the ARM precisely because his/ her income was less than $66.920.40 per annum which would have qualified for a 30-year FRM at 6.58% requiring a monthly payment of $2,230.68. For purposes of argument let us say that he / she had documents to support a monthly payment of $2,230.00 per month. Assuming a 3.0% increase in income per year, after 5 years the documents would support a monthly payment of $2,585.18. Can this home owner afford a monthly payment of $3,686.28 a month after 5 years? It is unreasonable unless we claim that by that time the borrower should shift to a FRM at current rates. Our proposal for a gradual increase in interest rate 0.25% per year for every year of extension gives such persons the option of either continuing with the current lender or switching to another loan under refinance. The affordability of this borrower starting with $2,230.00 a month is $2,296.90; $2,365.81; $2,436.78; $2,509.88; $2,585.18 during the first 5 years. This person just could not bear a payment of $3,686.28 after 5 years and would not mind abandoning the home through foreclosure. How many years of extension is required for the affordability to catch with $3,686.28 a month? In 12 years the affordability becomes $3,685.85 and after 13 extensions it is $3,796.42. Our proposal suggests a maximum of 24 extensions. For this marginal buyer the required extensions are 13 making her / his mortgage one of 43 years. I believe a new scheme as suggested would avoid foreclosures as long as the income increases at 3% every year. Of course if the lender chooses to lend for a person whose affordability is substantially less the lender is reckless. It is my understanding that before we had software programs advising automatic trigger to buy or sell depending on a particular stock crossing a trough or a crest, the time delays in the stock process used to dampen the panic. With computer facilitated stock processes that time delay is no more and thus the positive feedback introduced by the buy-sell triggers causes havoc with the market. I believe the above suggestion to avoid the step change from say 7% interest to 13% interest and replace it with gradual survivable escalation builds the necessary negative feedback to help stabilize the economy. As a banker what am I to do if I cannot get borrowers? Then I end up in the same position as the manufacturer who cuts the staff to reduce the loss. Such personnel reductions to reduce the loss would eventually lead to a depression. Instead if the banks are given the flexibility to extend the period of the loan by one year at 0.25% increase in interest per year most of the home owners would eventually build equity and own their homes. Am I right? I do not desire to put Ivan in any position of conflict-of-interest. But then how do we discuss a topic like this? Experts on finance would naturally have access to previleged information on finance. Do we hope that retired experts in finance give us some guidelines? | ||
| Mohideen Ibramsha |
Who could bear a burden of $3,686.28 a month after 5 years as the current 'Interest only' mortgage scheme expects? At 3% per annum increase in income, the current income should be able to bear a monthly payment of $3,179.82. Surely such an individual could afford a regular mortgage at $2,230.68. The current mortgage scheme is designed for failure. We feel a gradual increase in interest rates for every year of extension for a 5 year interest-only is the way to go. | ||
| Mohideen Ibramsha |
http://www.shanghaidaily.com/sp/article/2007/200703/20070319/article_309446.htm === The dollar tumbled against 12 of the 16 most active currencies after a report showed homebuyers with poor credit histories fell behind on their mortgages at the highest rate in four years, raising the likelihood the US Federal Reserve will cut borrowing costs sooner. ... Former Federal Reserve Chairman Alan Greenspan said on Thursday he expects the fallout from subprime-mortgage delinquencies to spread to other parts of the economy, especially if home prices decline. ... New Century Financial Corp, the second-biggest US subprime mortgage lender, said the Securities and Exchange Commission opened an investigation amid speculation the California company is on the verge of bankruptcy. === http://www.quickenloans.com/mortgage-news/article/565.html === By introducing language expressing concerns about the housing market, the Fed has has shown that this important sector of the economy is now receiving a high level of focus. ... The immediate reaction after the announcement by the bond market indicates the market views this positively and interst rates have fallen slightly === There is good news in the above. The fact that the Fed is concerned might lead to some action to avoid foreclosures. We hope that the Fed considers our proposal. We do not expect the home prices to decline. Whenever the interest rate has decreased, the affordability of home buyers increases and thus the prices go up. May be in view of the possibility of foreclosures, the home prices might remain steady instead of increasing. | ||
| Mohideen Ibramsha |
http://www.torontodailynews.com/index.php/BusinessNews/2007032804mortgage-inflat ion === Problems in the risky mortgage market are affecting some lenders and homeowners, especially "subprime" lenders who make home loans to people with bad credit histories or low incomes. === Why do these lenders give loans to people with bad credit histories or low incomes? We seem to be ignoring the fact that the lenders have money which otherwise would remain idle. In our economy money that remains idle loses. In the absence of high quality and high income borrowers it is better to give loans in the subprime category than to keep the money locked. Are we creating more money than could be absorbed? | ||
| Mohideen Ibramsha |
http://www.torontodailynews.com/index.php/BusinessNews/2007032804mortgage-inflat ion === Weak home prices and rising interest rates have made it increasingly difficult for this category of homeowners to keep up with their payments. === We do not agree. Weak home prices cause equity loss and thus do not permit the move to a prime loan from a subprime loan. We are told that if a loan is just for 80% or less of the property value, then one could move to a prime loan from the subprime - interest only loan. So the weak price denies the opportunity to refinance. Indeed just two years back we were looking at price appreciation of some 40% or more in some markets. But now there is a decrease with respect to say 2005 prices. How does it compare with 2002 prices? The borrower - as we have already shown on these pages - just could not afford the 6% hike in the interest rate once the 'interest only' period ends. Thus they see no option but foreclosure. Shall we say that the proposal to extend the 'interest only' period by one year with a corresponding increase in interest rate by just 0.25% with the same lender needs to be considered seriously by the authorities? | ||
| Mohideen Ibramsha |
Ohio state action: http://sanantonio.bizjournals.com/dayton/stories/2007/03/26/daily10.html === The program, offered through OHFA's 185 lending partners throughout the state, will provide 30-year fixed-rate loans for homeowners burdened by adjustable rate or interest-only mortgages or faced with circumstances like unemployment and divorce. === The above is indeed very good news. It offers to replace subprime loans by prime loans. Who are the beneficiaries? Quoting from the article, we have: === The bonds should provide assistance for about 1,000 loans (average loan amount is $100,000 per home) at about a 6.75 percent interest rate. Loans are reserved for those residents with income up to 125 percent of the median gross income of their county, ranging between $73,000 and $84,000. === A $100,000 30-year prime loan at the normal bank lending rate of 5.375% has a monthly payment of $559.97. If the borrower has documents to show income of $1,399.93 a month, the bank would offer the loan as the monthly payment is just 40% of the monthly income. Since this borrower does not have documented income of $1,399.93 a month or an hourly pay of $7.95 at 22 working days a month with 8 hours a day, we are considering possibly single income families working may be 6 days a week. What is the risk taken by the state? A loan of $100,000 at 6.75% requires a monthly payment of $648.60 which is 115.83% of $559.97. That is the State of Ohio is willing to forgive an inflation of about 16% of the income tolerated by the original lender. Any borrower who has received a loan by a larger margin might not get benefit, or the State of Ohio is putting itself at undue risk of foreclosures of these loans underwritten by it. Foreclosures suffered by the State of Ohio would eventually cost the general public as enhanced taxation. Is it better than our proposal to extend the loan period by just one year for an increase of 0.25% in the current interest rate paid by the borrower (which thus does not cause the general public to bear the burden)? Our proposal is purely market driven. | ||
| Mohideen Ibramsha |
http://money.cnn.com/2007/03/28/news/economy/paulson.reut/?postversion=200703281 3 === U.S. Treasury Secretary Henry Paulson said Wednesday damage to the American economy from the housing market downturn and subprime mortgage foreclosures "appears to be contained". Paulson, testifying before a House Appropriations subcommittee, said the Treasury was monitoring housing market developments closely but was encouraged by signs that the housing downturn was at or near a bottom. === The above possibly implies that it would be business as usual at the Fed with respect to the housing market. Is that good? | ||
| Mohideen Ibramsha |
Would the stock market intervene in the subprime market difficulties? http://www.forbes.com/finance/2007/03/28/subprime-mortgage-pf-guru-in_hn_0328soa pbox_inl.html === With the subprime sector bloodied, many contrarian investors are now wondering if it's time to jump back in. While we firmly believe that the subprime mortgage market will ultimately yield attractive investment opportunities, it is not yet "prime time" for subprime. Put simply, the situation is too volatile. The macroeconomic trends and market psychology are still evolving, and it's exceedingly difficult to make responsible investment decisions about subprime assets or companies. === As per the above analysis it would be wait and see at the Wall Street. For an investor - as we are told to buy a share only when the share is bottoming out, the subprime market should reach its worst position before Wall Street would act. That might mean a lot of avoidable foreclosures just because the business as usual does not avoid foreclosures. | ||
| Mohideen Ibramsha |
http://www.dailyreckoning.co.uk/article/handsupforahousingcrash0143.html === - Manager of the world's biggest bond fund, Gross thinks lower house prices will force the Fed to cut Dollar interest rates. His model puts US interest rates back at 4%, down from the current 5.25%, if the Fed's going to keep home prices stable. - And if the Fed doesn't cut? Average home prices may fall by one fifth, says Gross. - "Investigate the Fed’s own study," he advises, "written in September of 2005 [and] covering housing cycles in aggregate and individually for 18 countries over the past 35 years. This study’s important conclusion...is that if home prices in the US have peaked, and are expected to stay below that peak on a real price basis for the next three years, then the Fed will cut rates and cut them significantly over the next few years in order to revigorate an anemic US economy." === Are we to expect that the Fed could sleep for 3 years to realize that the economy is anemic and then post haste take action? The other conclusion is that if the housing sector is left to the existing norms and market trends it would make the economy anemic. That is what the adversaries of USA want! Should Congress and Senate let this administration continue on 'business as usual?' | ||
| Mohideen Ibramsha |
Can the Fed act now and reduce the interest rates? Quoting from http://www.dailyreckoning.co.uk/article/handsupforahousingcrash0143.html again we have: === Japanese land values for commercial and residential property now trade for half the price of their 1989 peak. - But what a peak! And what a mess Japan's had to endure trying to unwind it ever since. Gearing up to speculate on the wasting asset called real estate cost Japan more than a decade of recession, depression, banking defaults and deflation. === If we let the housing prices fall from their peak we are bound to follow Japan. The existing economic model has already shown the effects in Japan. If we stick to the existic economic model we are sure to get the same results. Should we? Should we not act to avoid foreclosures which invariably cause house prices to fall? | ||
| Mohideen Ibramsha |
Can the Fed do anything to help the housing market? We see that it has intervened earlier. http://www.aei.org/publications/filter.all,pubID.25857/pub_detail.asp === Consider another notable experiment with mortgage lending: the creation of the long-term, fixed rate, amortizing mortgage loan. There is no doubt that this form of mortgage loan is highly attractive to borrowers. Introduced in the 1930s in response to the complete collapse of the mortgage market, it has been very successful in many ways. === Why not the Fed intervene now? In our opinion we expanded the money flow by creating the process of securitization. Quoting again: === In economics, nothing is ever free. To preserve the fixed rate mortgage no longer provided by savings and loans in the 1980s, it was necessary to depend on vastly expanded securitization. Securitization typically breaks the link between the originator of the mortgage loan and who actually bears the credit risk. This usually results in riskier and less careful lending. The financing engine of the subprime mortgage boom was securitization. This structure has greatly suffered, as is now clear, from just this break in credit decisions from credit risk bearing. === By introducing a variable term mortgage as suggested earlier, we avoid the collapse. A lender who assumed the risk by offering the subprime loan continues to carry the risk. For immediate reference we quote the suggestion again. 1. The mortgage is a 30 year mortgage with the initial 5 years as 'interest only.' 2. After the 'interest only' period is over there is a 25 year regular principal plus interest mortgage. The lender has the option to hike the interest rate upto a maximum of 6% with respect to the initial agreed interest rate. If the initial loan was at 7.375%, the maximum interest rate forever for this mortgage is just 13.375% only irrespective of the number of extensions granted. 3. Instead of fixing the 'interest only' period as 5 years, we permit the borrower to increase the 'interest only' period a maximum of 24 times at one year at a time with an increase of 0.25% every year. 4. Once the interest rate has reached the maximum the loan automatically becomes the normal 25 year mortgage. 5. There is no penalty for prepayment. 6. The borrower retains the option to refinance. The proposal does not cause expansion of money. It avoids contraction of money and foreclosures. | ||
| Mohideen Ibramsha |
http://www.sun-sentinel.com/business/local/sfl-zmortgagebox06apr06,0,7698014.sto ry?coll=sfla-business-headlines === The push: Mortgage companies are knocking on doors, making phone calls and hosting events in hotel ballrooms to persuade troubled borrowers to modify their home loans and avoid foreclosure. The financial companies lose money on foreclosure; they say they want to avoid it as much as homeowners. If you're in trouble: The Home Ownership Preservation Foundation runs a 24-hour hotline for any borrower at 888-995-4673. === | ||
| Mohideen Ibramsha |
http://www.thestreet.com/_googlen/funds/realestate/10348141_4.html === Most borrowers would be better off either asking the lender for time to sell the house, even at a discount, through a preforeclosure sale, also known as a short sale, or voluntarily giving the property back to the lender through what is called a "deed in lieu of foreclosure." Both of these options are less damaging to your credit rating than simply abandoning your house, and you may be able to get some assistance with moving expenses. === http://www.thestreet.com/_googlen/funds/realestate/10348141_3.html === In general, however, the kind of assistance available falls into the following three categories: Forbearance plans, which allow you to postpone payments, typically for six months, after which time you have to start paying the arrearage. Delinquent refinances, in which borrowers who are less than three months behind may be able to refinance at a lower rate, folding the missed payments back into the loan. Temporary or permanent modifications of the terms of the loan, such as the interest rate or monthly payment. === Our proposal would fall under the category of permanent modification. | ||
| Mohideen Ibramsha |
http://www.humancafe.com/discus/messages/88/89.html?1176341786#POST3621 === It is sorrowful, but also part of the process of discovery, when it comes to call a stop. Ivan === I do not know whether the 'stop' applies to all threads. I venture to post again because I believe we could - and indeed we should - avoid the subprime housing market pulling the whole economy down. Do let me know so that I do not waste our time by trying to post when I am to have stopped. http://www.thestar.com/Business/article/202195 === He said the prognosis that risks had receded may be surprising to onlookers, considering news headlines of foreclosures in the U.S. subprime mortgage market and a softening of business investment. "You might ask if the U.S. sneezes, won't the rest of the world catch cold?" Johnson said. "Our bottom-line view is that, while the U.S. may indeed have sneezed, it appears to be a mild sneeze thus far and not likely to spread." The monetary fund said the important question when assessing the risks was whether the world economy could insulate itself if the U.S. downturn becomes more severe. For now, however, the U.S. slowdown has been limited to a housing-sector correction, the report said. === Can a 'housing sector correction' not affect the rest of the US economy? If the foreclosures are rising it implies viable families becoming unviable. At what percentage of population could we say that the overall economy would get affected: 5%, 10% or more? Could any economist throw some light? | ||
| Ivan |
Objectivity in the spirit of earnest discussion is never stopped. Nor are personal views and opinions. What is stopped here is the big stick of religion dictating those opinions and views at the expense of earnest discussion and objectivity in our reason. What gets sacrificed to the big stick, when this happens, is the truth, and thus the discussion is stopped. You are welcome to talk about mortgages, or any subject, but stay within those guidelines above, of ojectivity, personal opinion, and not big sticks of dogma to push religiously inspired insanity that offend our sensibilities of reason. You are free to discuss as long as you do not offend our freedoms. Ivan | ||
| Mohideen Ibramsha |
http://www.realtytrac.com/news/Press/newsletter-articles.asp?a=b&ItemID=1975&acc nt=144142 === “John Tuccillo, formerly chief economist for the National Association of Realtors, said that with more than $1 trillion in adjustable-rate mortgages set to reprice upward this year, homeowners are looking at a 25% rise in the amount of house payments unless they refinance,” according to the The Milwaukee Journal Sentinel. (See: “Mortgage rate may play into spending,” January 9, 2007) === How many borrowers are involved in this $1 trillion ARMs? http://www.realtor.org/Research.nsf/files/EHSreport.pdf/$FILE/EHSreport.pdf gives the median value of $221,900 for 2006 for the whole US market. We assume that the ARMs are each for $221,900 while in reality the poor could be expected to buy houses that are low priced compared to the median. Dividing a trillion by 221,900 gives 4,506,534 implying more than 4.5 million home owners could face an increase of 25% in their monthly payments. Surely such increases could push them to foreclosure. Assuming an interest rate of 6% before increase, the monthly interest-only payment for a $221,900 mortgage is $1,109.50. When the interest rate increases to 6.25% as proposed by us, the monthly payment increases to $1,155.73 and increase of $46.23 per month or $1.541 per day. This moderate increase is decidedly affordable while an increase of more than $275 per month might not be. We suggest that the lenders who are in a position to hike the interest rate by 1.5% or more reconsider their decision. The existing ARMs allow a maximum of 6% increase in the interest rate. There is no minimum prescribed. Rather than increasing the interest rate from 6% to 7.5% and forcing their clients into foreclosure, they might as well increase the interest rate by 0.25% every year and retain their clients in good financial health. | ||
| Mohideen Ibramsha |
We suggested a new mortgage plan of extending the ‘interest only’ period by one year while increasing the interest rate by 0.25% for every year of extension. It turns out that a wise lender could help his / her borrower clear the loan by avoiding greed. The lender has the freedom to increase the interest rate by 6% after the initial ‘interest only’ period. We have assumed that the borrower’s income increases by 3% every year and that the monthly payments could be increased by 3% every year without any hardship to the borrower. The interest rate stays at 6% for the first 5 years and increases by 0.25% every year until it becomes 12% on the 29th year of the loan. At the end of 30 years, the borrower owes just $24,267.96 which could be easily paid by a loan for the same amount for one year only. That is, the loan gets repaid within 31 years without any documentary proof of income. If the borrower desires, we expect, he / she could get a prime loan at the start of the 20th year of the undocumented loan. At the start of the 20th year, the loan is $175,258.60 which is less than 80% of the initial value of the house at $221,900. Since there is equity for more than 20% of the required loan, the borrower could seek a prime loan. Let us assume that the interest rate for prime loan is 6%. Refinancing is for a period of 30 years. For a prime loan the monthly payment is $1,050.77 which is just 54% of the monthly payment of $1,945.51. It is expected that the borrower would have documented income to support the monthly payment of $1,050.77. The total period of the loan is 49 years. The table showing the monthly payment, interest paid during the year, principal paid during the year etc. is given below. Year; Rate; Monthly; Interest; Principal; Loan next year start 1 6.000 1,109.50 13,314.00 0.00 221,900.00 2 6.000 1,142.79 13,314.00 399.98 221,500.52 3 6.000 1,177.07 13,290.03 834.81 220,665.71 4 6.000 1,212.38 13,239.94 1,308.62 219,357.09 5 6.000 1,248.75 13,161.43 1,823.57 217,533.52 6 6.250 1,286.21 13,595.85 1,838.67 215,694.85 7 6.500 1,324.80 14,020.17 1,877.43 213,817.42 8 6.750 1,364.54 14,432.68 1,941.80 211,875.62 9 7.000 1,405.48 14,831.29 2,034.47 209,841.15 10 7.250 1,447.64 15,213.48 2,158.20 207,682.95 11 7.500 1,491.07 15,576.22 2,316.62 205,366.33 12 7.750 1,535.80 15,915.89 2,513.71 202,852.62 13 8.000 1,581.87 16,228.21 2,754.23 200,098.39 14 8.250 1,629.33 16,508.12 3,043.84 197,054.55 15 8.500 1,678.21 16,749.64 3,388.88 193,665.67 16 8.750 1,728.56 16,945.75 3,796.97 189,868.70 17 9.000 1,780.42 17,088.18 4,276.86 185,591.84 18 9.250 1,833.83 17,167.25 4,838.71 180,753.13 19 9.500 1,888.84 17,171.55 5,494.53 175,258.60 20 9.750 1,945.51 17,087.71 6,258.41 169,000.19 21 10.000 2,003.88 16,900.02 7,146.54 161,853.65 22 10.250 2,064.00 16,590.00 8,178.00 153,675.65 23 10.500 2,125.92 16,135.94 9,375.10 144,300.55 24 10.750 2,189.70 15,512.31 10,764.09 133,536.46 25 11.000 2,255.39 14,689.01 12,375.67 121,160.79 26 11.250 2,323.05 13,630.59 14,246.01 106,914.78 27 11.500 2,392.74 12,295.20 16,417.68 90,497.10 28 11.750 2,464.52 10,633.41 18,940.83 71,556.27 29 12.000 2,538.46 8,586.75 21,874.77 49,681.50 30 12.000 2,614.61 5,961.78 25,413.54 24,267.96 If the lender increases the interest rate to 6.25% on the 6th year, 7.5% on the 11th year, 8.75% on the 16th year and so on, the loan gets repaid fully during the 29th year itself without offering any documentary proof of income. The table is given below. Year; Rate; Monthly; Interest; Principal; Loan next year start 1 6.000 1,109.50 13,314.00 0.00 221,900.00 2 6.000 1,142.79 13,314.00 399.48 221,500.52 3 6.000 1,177.07 13,290.03 834.81 220,665.71 4 6.000 1,212.38 13,239.94 1,308.62 219,357.09 5 6.000 1,248.75 13,161.43 1,823.57 217,533.52 6 6.250 1,286.21 13,595.85 1,838.67 215,694.85 7 6.250 1,324.80 13,480.93 2,416.67 213,278.18 8 6.250 1,364.54 13,329.89 3,044.59 210,233.59 9 6.250 1,405.48 13,139.60 3,726.16 206,507.43 10 6.250 1,447.64 12,906.71 4,464.97 202,042.46 11 7.500 1,491.07 15,153.18 2,739.66 199,302.80 12 7.500 1,535.80 14,947.71 3,481.89 195,820.91 13 7.500 1,581.87 14,686.57 4,295.87 191,525.04 14 7.500 1,629.33 14,364.38 5,187.58 186,337.46 15 7.500 1,678.21 13,975.31 6,163.21 180,174.25 16 8.750 1,728.56 15,765.25 4,977.47 175,196.78 17 8.750 1,780.42 15,329.72 6,035.32 169,161.46 18 8.750 1,833.83 14,801.63 7,204.33 161,957.13 19 8.750 1,888.84 14,171.25 8,494.83 153,462.30 20 8.750 1,945.51 13,427.95 9,918.17 143,544.13 21 10.000 2,003.88 14,354.41 9,692.15 133,851.98 22 10.000 2,064.00 13,385.20 11,382.80 122,469.18 23 10.000 2,125.92 12,246.92 13,264.12 109,205.06 24 10.000 2,189.70 10,920.51 15,355.89 93,849.17 25 10.000 2,255.39 9,384.92 17,679.76 76,169.41 26 11.250 2,323.05 8,569.06 19,307.54 56,861.87 27 11.500 2,392.74 6,539.12 22,173.76 34,688.11 28 11.750 2,464.52 4,075.85 25,498.39 9,189.72 29 12.000 2,538.46 1,102.77 29,358.75 (20,169.03) 30 12.000 2,614.61 We believe reasonably executed non-documentary sub-prime loans could avoid foreclosure by cooperation between the lender and the borrower. Having found a way to avoid the foreclosure of sub-prime loans, we do not plan to post more on this thread unless discussion warrants the same. | ||
| Ivan |
Efforts to ease US 'sub-prime' mortgage woes http://news.bbc.co.uk/2/hi/business/6565497.stm
It seems FNMA and Freddie Mac are looking at this too, how to offer mortgages that can ease the current sub-prime crisis. Far better to salvage existing mortgages from possible default than to build inventory of unsold houses for people who need them. Banks do not like being in the 'landlord' business of repoed homes. Ivan | ||
| Mohideen Ibramsha |
Ivan thanks for the good news. We suggest one group of home owners who deserve to be helped. A regular 30-year mortgage at 5.375% rate for $350,000 has a monthly payment of $1,959.90. A loan of $350,000 at a rate of 7.375% with a 5-year interest only has a monthly payment of $2,151.04. Many home owners have opted for the 5-year interest only followed by 25 year regular mortgage in the hope that within the 5 years the equity would build and thus they could refinance. They are paying $2,151.04 a month. Surely they could afford to pay $1,959.90 a month required for a regular mortgage. Could we hope that all those home owners who have not defaulted so far in their monthly payments of interest-only mortgages secured with 'stated income' are granted the regular mortgage on 'stated income?' We agree that the 'stated income' mortgages could be discontinued in future. However the cases where the lenders have assumed the risk and sanctioned the 'stated income' loans could be helped. Such a permission to refinance would help the lenders avoid insolvency and thus help the economy too. | ||
| Anon |
With the global stock markets melting down and oil prices falling we should note that this crisis was brought about by aggressive lending practices that targeted the weakest members of our Western Economic system. This coupled to floating our war debt and out-sourcing many of the security and support functions of our combat troops has helped to push our economy into resesion. Our current administration bet that it could wage war and remake the Middle East into a democratic bastion by leveraging the power of our market based economy. However, this concept failed to include the fact that our a large part of our economic growth was based on what amounts to an advanced ponzi scheme in the housing sector. In the Middle East economies based on oil are now reeling from the drop in oil prices. Production was increased, money invested and infastructure projects initiated based on projected oil revenues. The last time oil prices fell as far and as fast in the Middle East the Middle Class of the region was hurt badly by it. This econmic hurt gave rise to Osama and his ilk who used it to sway the masses. Now as oil falls and the stock markets melt. Osama and his ilk will use this as propaganda to illustrate the weakness of the West. Imagages of big houses laying vacent filled with luxury goods bought on easy credit fill the media. These excesses and their consequences will be manipulated by Osama and his ilk to further their message of Western decline. Failure by the federal government to regulate the markets and actions of the lenders has brought about this current enconomic crisis. As we seek to stem the damage to our economic system our enemies laugh and twist the facts to support their position. Such is what eight years under our current president has brought us. Is it no wonder the onging elections are chaotic? While Rome burned this administration fiddled. Like in all things they lack vision, failed to see the truth and failed to act in a timely manor to prevent or reduce damage to our economy. | ||
| ananimas |
In the Middle East economies based on oil are now reeling from the drop in oil prices. Production was increased, money invested and infastructure projects initiated based on projected oil revenues. : Posted by Anon If true, then it is most strange that oil dropped from $100 a barrell to about $90, only 10%, and this caused chaos to be exploited by O bin Laden. America's economy is working off excess, too many houses built, which may cause slowdown econoomically, but not the dire collapse of our market based economy as some fear. AQ and OBL will have to work harder to find cracks and fault to exploit for their religion of hate than the current housing and mortgage crisis. | ||
| Anon |
http://www.newsweek.com/id/104334 'Innocent Victims' Robert J. Shiller It's no surprise that the subprime debacle is continuing to fuel last week's market turmoil. The world is currently emerging from the biggest real-estate bubble in more than 100 years. Perhaps the best historical analogy to today's situation is the bubble that developed and deflated throughout the 1920s and '30s. In the four years leading up to 1925, there was a 19 percent increase in real home prices, and then prices fell 13 percent from 1925 to 1932. In comparison, from 1997 to 2006 there was an 85 percent increase in real home prices, followed by a fall of less than 10 percent so far. The 1920s bubble was due in part to a euphoria driven by a technology boom, including the advent of radio and the mass production of the automobile. As people began to drive, there was a sense that the world would run out of land. Resort areas like Florida, now accessible by car, boomed. Then, as now, there was also an explosion of easy credit. In fact, mortgage defaults were a substantial part of the Great Depression. One crucial difference: the government back then did a lot more to cushion the fallout, instituting major public programs to bail out homeowners. By comparison, the Bush administration has done very little. To me, that's a problem. The idea that we should simply let average citizens take the pain seems unjust--there are a lot of innocent victims of the subprime debacle. I think we need more substantive public-policy responses to the crisis. In the future, there should also be safeguards against mass defaults. People need more protection. Shiller is a professor of economics at Yale University and a cofounder of MacroMarkets LLC. | ||
| CC |
La Domanda di Davos -- video in English http://www.youtube.com/watch?v=B2cHioTScwc "Make the world a better place." | ||
| Ivan/Davos |
Davos reality check BBC News, is the US taking the world down path of recession? Markets around the world had been volatile last few months in response to banking crisis, Fed sharply cuts rates, fiscal stimulus package proposal may be rushed for first tax refund checks mailed by May, so all eyes are on Wall Street and US economy. From the article: When a 'watched pot' is so well watched, it may not boil as expected. Unlike past potential recessions, all eyes are on the US economy and how Federal Reserve will respond with its money 'weapon' to the pending credit crisis. Economies run on credit, and often as do stock markets. If the flow of funds does not dry up, all other things being equal, usually there is room for guarded 'optimism', in my opinion. The next few months will show whether this is a spiraling crisis, or whether it had been addressed properly and economic growth, albeit subdued, will carry the day. The real puzzle may be one of perception, where gold at $900/oz is signalling 'inflation', while interest rates at near record lows are signalling none. Which will prove right this time next year? Ivan | ||
| Sharia Dubai |
Sharia Banking and the First Amendment ... Not what you think.  Islamic banking in Brunei Jihad Economics and Islamic Banking ... Is the West ready for Sharia Banking? Do we understand?
Does anyone in Washington have a clue? We are sliding slowly into the quicksands of the desert Arabs with Sharia Banking, where even our US Constitutional laws are 'defenseless' against the sands of Sharia encroachment. Read it all! They're buying us.  Dubai Towers
Don't be too impressed with Dubai. It's your petro-dollars at work, your 'Sharia compliant' money. Did you know? Are you eager to support this? How about 'charity' (sic) aka Zakat? Did you know? Think my friends, because Sharia is anti freedom slavery, and you First Amendment can't help you! Nor is Islamic 'charity' zakat what it means in the West to help the poor. Read it all. SOL | ||
| 3D printing construction affordable housing |
3D printing construction for affordable housing - BigDelta WASP  12 meter high 3D printer (This article was submitted to Humancafe by Mohideen Ibramsha.) Good Forever. More on this: Here is a link to another page that talks about 3D printing to build homes, with video showing demo. http://www.treehugger.com/green-architecture/wasp-3D-printer-affordable-mud-homes.html More updates to follow. Ivan |