Why YOU want your interest rates to go up

Why YOU want your interest rates to go up

Throughout the 80’s and 90’s we had a cultural epiphany on television. There were shows on television that were well written and produced. The Cosby Show dealt with issues that faced the African American community at the time. Miami Vice glamourized Miami, but also exposed a growing drug trafficking culture. Married with Children showed the disillusion of the everyman in a satirized way. Then MTV had to go along and ruin it with the Real World (which ceased to be anything real after RW: San Francisco). MTV discovered it could create drama without a script, hire cast for a pittance if not for free, and decrease the production costs. After years and years of Big Brother, Survivor, the Kardashians, and the Real World, man cannot survive on reality TV alone. You would have never thought of saying the 80’s and 90’s were the good ol’ days.

There is something else that I really wish would come back from the 80’s. No, it’s not Dan Aykroyd or leggings. It’s interest rates. The American people as a whole have woken up to the economic reality of today. Living outside of your means is no longer feasible. People are saving more . The irony of it all is that interest rates on a variety of different savings accounts is minimal if in existence at all. That kind of action only seems to inspire frivolous spending and “chasing” yield with riskier investments. The party line from those advocating a low rate policy is, “We are trying to stimulate investment.” I think the appropriate retort would be, “ If the investment was going to come, it would be here already.” Another common defense is, “We need to bring lending rates down to support housing.” If somebody is going to buy a house, they are going to have 15% or 20% now anyways. The economy is changing and the hope should be that we are changing from a consumer economy to a production economy.

The Fed, with its low interest rate policy, has “put out the fire.” Lifting interest rates would follow the natural mental progression of investors and consumers alike who will say, “Okay, things are returning to normal.” Whether or not it’s actually true, or if it’s only the placebo effect – who cares, as long as the patient gets better and confidence is restored?

Twelve years into a new century, TV execs are taking some risks and putting quality back on TV – shows like LOST, Modern Family, 24, and The Office. I’m not sure what Jack Bauer or Michael Scott would do to fix the economy, but hopefully it wouldn’t be the same thing over and over. Well, okay… Michael might.

Stop the Foreclosure

It's another Tuesday afternoon, slightly overcast. A BMW 650I whizzes by a yellow cab in the financial district of a nondescript metropolitan city. A large man hops out of the cab and throws a Jackson at the cabbie. He heads up to the 16th floor of the high rise. The elevator opens and he heads to suite 316. As he walks in, the man sees pencil neck geeks furiously signing paperwork, flipping through pages and wildly signing more. The man who looks curiously like Arnold, but has the air of the famous lawman Robocop, raises his licensed firearm and yells in his strangely familiar Austrian accent, "STOP THE FOREEEEECLOSURRRRREEEEEE, ASSHOLE!"

No, this isn't the start of a huge action scene in the next blockbuster for Arnold Schwarzenegger. It's probably the day dream of millions of Americans who went through a quasi-legal foreclosure process.

In states all over the country, the investigations process is at different stages. Some are looking to assess penalties and fines, some are busy gathering facts, and, in some states, wrong doing hasn't yet been decided. For a quick rehash, thousands upon thousands of families in the last few years were unceremoniously kicked out of their homes. Many of these situations stemmed from buying more house than they could afford; others were from loans that had enticing teaser rates for a while that would be eventually unsustainable. These unfortunates were in some cases kicked out their homes without due process, or, in some more insidious cases, due process was executed with falsified loan documentation (aka the "Robo signings").

Currently, deals in some states are being negotiated to prevent prosecution and secure a financial settlement. Other states are being aggressive and actively pursuing the breach of public trust with the full force of the law.

In a majority of these situations, the homeowners – some naive and some not – were "shaken down" by the industry. The industry swindled the general public when they were buying homes, and again as they were kicked out of those same homes only to receive property back that was only worth pennies on the dollar and depressing the market further. Very productive indeed.

My hope is that the eyes of the public will be opened as a result of these investigations and possible prosecutions. When dealing with buying a home loan and the entire process associated with it, the people you are working with aren't your friends. They aren't " helping you"; they are business partners, hired hands. Like any good business partner, always keep an eye on them.

-The Inside Associate

P.S. The Inside Associate blog is now reaching over two hemispheres, a few major continents, and a few G-8 Countries. I would love to reach out to the readers in Europe and across the globe to provide feedback. Things you would like to see on the blog, questions you may have, or just general commentary. I'm always grateful for any insight. I'm exceedingly grateful for you giving us some run to your friends in the general public and the industry.

BMW, lending, Robo Signing, RoboCop, Schwarzenegger, zombie foreclosure

A foundation or a farce ?

A foundation or a farce?

There is a lot of news coming out as of late from the Federal Reserve. The news I'm talking about isn't regarding QE2 or raising interest rates. The fed is in discussions about regulatory provisions from the Dodd-Frank Act (Link). These provisions are a beast at over 450 pages. The Wall Street Journal's Alan Zibel wraps it up pretty succinctly in this post on April 18th. Most notably, the standards for home loans – conventional and "non-standard" – are clearly fleshed out and easy to understand.

As of the writing of this post on April 19th, these are only proposals (here are the highlights). However, I think this an important step in helping to reconstruct a housing market that did its best, for the better part of the last decade, to run amok all the way over the cliff. Transitioning from a "no holds barred" mortgage origination paradigm to structured, concise guidelines will be a boon for just about everyone. Banks and lending institutions will have clear standards to abide by, mortgage backed securities (MBS) buyers will breathe a little easier, and, most importantly, the general public will be more secure in their future efforts to buy a home.

Reviewing the newly proposed rules, there are few interesting nuggets. The first is the need to "consider and verify" such basics as employment status, debt to income ratio, credit status, and "income or assets used to determinate ability to repay." The fact that this has to be spelled out in black and white is almost mind numbing. A "qualified mortgage," which has yet to have its down payment ratio defined, would not include loans with negative amortization, interest only payments, terms longer than thirty years, or balloon payments. In addition, there is a cap on fees and total points limited to 3%. Lastly, for many of those potentially damaging adjustable rate mortgages and other "nonstandard" loans, creditors have the option to refinance them into a "standard" loan if they meet that respective criteria.

With the impending end of Fannie and Freddie now in the foreseeable future, having clear and logical rules for "vanilla" mortgages and existing exotic loans will be a confidence booster for the consumer. Moreover, the ability to roll those exotic loans over into conventional loans with a fixed rate will help promote the recovery of the market.

These proposals, coupled with clear risk-retention rules (currently TBA), will provide a solid foundation for reliable housing growth and, more importantly, economic prosperity. There remains, however, one question that looms ominous in my mind: Will the banking/private lenders fight this regulation? Hopefully, after this last disaster’s destruction of billions of dollars of home value, the industry can recognize the sensibility of this proposal.

-The Inside Associate