A terrifying glimpse into the US mortgage market, via Rafe Coburn, from which it emerges that until about six months ago, you could borrow enough to buy a house valued at a million dollars on a household income of less than a tenth of the sum. What is more, these loans are not on the books of the banks as “sub-prime”. That’s your pension invested in those loans.
I was also led to discover the wonderful world of “Neg-am” mortgages: the deal here is that for the first three or five years, your debt actually increases, because you are not even repaying the full interest, let alone the principal. But that’s all right, because in five years’ time the house will be worth far more than what we paid, right? And we’ll all be millionaires from our stock options, right … right?
The real trouble, it seems to me, is that this housing bubble can’t be collapsed, as housing bubble traditionally are, by a general inflation, because that might lead to a dollar collapse. I suppose that if everybody sees this, some way might be found to manage the mess. But that bungalow in Moskosel looks more fun every minute.
D’you know, I had a neg-am mortgage – except I didn’t realise it was that – in 1988. First house, and the friend who I’d bought it with and I merrily thought it wasn’t so hard: we didn’t have to pay the full whack each month.
Then I noticed that the unpaid interest was being added to the principal. And then interest rates shot up. Wow. I did some intensive work with a spreadsheet and realised just how bad it was going to get. We paid a lot of interest and principal back very quickly.
It was from Security Pacific. I still remember their name with hate.
And that’s before I mention that they also sold it with an endowment. And people wonder why folk who went through the last housing crash can’t believe a word financial institutions say?
yeah neg-ams are fun. hell you don’t even get the tax break- you get a break on all the interest you pay, not all you manage to accrue. balloon payments are even more awesome examples of future discounting. you pay a lower payment for ages, then at an appointed time you pay what you haven’t paid all along. many people that have them don’t understand that they are coming. so, look for lots of cheap residential and even more cheap commercial property hitting the market Soon! most people don’t talk about the condition of commercial loans. they are better than residential, but not much. for even more fiscal fun, when a business can’t make the mortgage, you often get bonus unemployed people too.
looking at http://en.wikipedia.org/wiki/Category:US_mortgage_industry can eat day, and suddenly you see pretty mushroom clouds every where you look.
some alarming rate of house buying for the last few years, i think i heard 25%, but i haven’t found the source, were rental properties. those were sold just as bad or worse as primary housing. those are still being pushed as hard as ever now- 0% down loans and arms and so on, all the typical things that typically make for foreclosure. people simply aren’t going to try as hard to keep that housing when it goes bust. that’ll be a fun market effect.
right now rental rates are often much lower than mortgage rates. it makes more financial sense to rent and invest than to buy. i think that’s going to just get more true over time, as housing prices fall and the criteria for borrowing rises.
also, i think this and neg am and the subprime crisis add up to lowered consumer spending, which is what supports our wiley coyote economy. war spending, budget shortfall, job insecurity and the decreasing asian confidence in the dollar- it’s all there and more. all of it adds up to the dollar going argentinian. fun days ahead!!
this is why i’m not invited to parties anymore.
There was a letter in the FT about 3 months ago now, from a plastic surgeon who used to have a practice in LA.
Plastic surgery is quite often done on the never-never, and he and his partners spent a lot of time running a kind of credit bureau.
Two people came in wanting plastic surgery on tick, wielding obviously fake ID. They were refused and were livid – they’d spent $45 each on those fake IDs and had already got a car and a mortgage on the strength of them.
As the plastic man put it “you can’t foreclose on a nose-job” so his credit checking had to be more thorough than the car or mortgage people.
Actually, there is the makings of a wonderful television series there — Dorian the Enforcer: the man whose job it is to repossess their looks from the delinquent clients of a plastic surgeon. I can quite easily imagine how you repossess a nose job. It’s less clear what you do about a tummy tuck.