So what will be the downside in the future arising from all of the ..............

SanctionII

............................. 30 year fixed mortgages at less than 4% interest per year that have been made over the past couple of years?

Will we have a future scenario where the owners of these long term fixed rate mortgages will see a big crunch between their revenue (monthly payments on the mortgages paying less than 4% interest) and their expenses (short term borrowing costs, interest rates that must be paid to customers to convince them to deposit their funds with the lender, and simple expenses of keeping the doors open and the recurring bills paid being much more than the lenders monthly income).

If lenders who own these loan portfolios have to sell to raise capital, the sales prices they can expect to get in the market will be severely discounted below par in order to give the purchaser a rate of return (measured on the purchase price not the principal amount of the loans being purchased) that is competitive in the current market (i.e. market interest rate for a 30 year fixed rate loans goes back up to 7.5 %).


This happened before in the 70's and early 80's and caused many lenders to fail. Will history repeat itself?

secondrepublic

History will probably repeat itself again. The difference is that this time, many of the loans are owned by government-sponsored entities like Fannie Mae. Undoubtedly there will be losses, but for the policymakers, that's far in the future and therefore not really a concern.

OPA

Uncle Sam will pick up the tab, since a majority of the mortgages are only serviced by the banks but sold to Freddie Mac or Fannie Mae. Back in the 80's, your Savings & Loans got hammered and their Assets sold via the Resolution Trust for penny's on the dollar. Lots of smart speculators became millionaires after purchasing properties from the RTC.

(Edited to change G. Mae to Fa. Mae)

jmski52

Quite a bit depends on who gets bailed out, and who pays.

derryb

It all hinges on the FED's zero interest rate policy. One school of thought is that we are foolishly locked indefinitely into ZIRP. Your scenario adds one more reason to hold rates down indefinitely since we would be looking at the potential failure of organizations that recent history has shown will be protected at all costs.

NumbersUsacom

Correct me if I'm wrong, but are not most of these loans either already are, or in the process of being held by Fannie and Fredie? whom we the tax payer already bail out on an ongoing infusionary basis.

OPA

<< <i>Correct me if I'm wrong, but are not most of these loans either already are, or in the process of being held by Fannie and Fredie? whom we the tax payer already bail out on an ongoing infusionary basis. >>



I believe you are correct.

quarterguy

As of Aug 1, 2012 Fannie Mae and Freddie Mac own or guarantee more than 50 percent of outstanding mortgages, a market valued at $10 trillion. They have been bailed out so far by about $200 billion. The current plan is to reduce their holdings. As in any other market the government has been involved in, they totally screwed this up. They need to go away and let market sort itself out.

jmski52

It's going to be hard to put money into interest-bearing accounts or bonds and expect any type of return to live on during retirement unless you liquidate (and spend) your principal as you go.

Of course, the bailouts and overspending and debt load make it even harder as the dollars continue to erode in purchasing power. It's going to be kind of a double whammy, so get ready for it.

NumbersUsacom

<< <i>It's going to be hard to put money into interest-bearing accounts or bonds and expect any type of return to live on during retirement unless you liquidate (and spend) your principal as you go.

Of course, the bailouts and overspending and debt load make it even harder as the dollars continue to erode in purchasing power. It's going to be kind of a double whammy, so get ready for it. >>



Thats a very good point, well worth remebering during any future plans.

quarterguy

The future is now.

pruebas

<< <i>As of Aug 1, 2012 Fannie Mae and Freddie Mac own or guarantee more than 50 percent of outstanding mortgages, a market valued at $10 trillion. They have been bailed out so far by about $200 billion. The current plan is to reduce their holdings. As in any other market the government has been involved in, they totally screwed this up. They need to go away and let market sort itself out. >>

You would be singing a different tune if you were in the process of buying a house and it was YOUR loan waiting to be approved by the bank (delayed because they needed to find a buyer for your mortgage before they would approve it).

fishcooker

Which point would I be singing - that the gov really screwed up and should get out of our way, or that the gov should continue buying mortgages and writing checks they can't cover?

quarterguy

No I would not be singing a different tune. And you miss the point.

The banks do not need to sell their loans to a tax payer backed entity. They can lend their own money.
The tax payers should not be liable for loans made by the banks.

LochNESS

All I know is, our rate used to be 6% and now it's 4%. The monthly savings have been great for my collection

NumbersUsacom

<< <i>

<< <i>As of Aug 1, 2012 Fannie Mae and Freddie Mac own or guarantee more than 50 percent of outstanding mortgages, a market valued at $10 trillion. They have been bailed out so far by about $200 billion. The current plan is to reduce their holdings. As in any other market the government has been involved in, they totally screwed this up. They need to go away and let market sort itself out.

>>

You would be singing a different tune if you were in the process of buying a house and it was YOUR loan waiting to be approved by the bank (delayed because they needed to find a buyer for your mortgage before they would approve it). >>



Not if I had a good to great credit score. Its freddie and fannie that bought the poor credit score (should't have been buying a home anyway) people buying with 0-3 1/2 % down with no verifiable steady incomes that really created this fiasco. Congress itself forced this on the banks and made a way through fred and fan to do it.

I'm glad we are seeing more restrictive lending, actually its just been reset back to where it was in 1995 or so before our brilliant Congress shoved the bill down the banks throats and ultimately ours, could the banks have been complicit- I sure would not rule it out.