Fixed Rate Mortgages Soften?

The Financial Markets aversion to risk is making its position known these last few days and the result of which (one of them anyways) is a rush to the Bond Markets.   The result of which has been a softening in Fixed Rate Mortgages.

For those of us observing the inevitable exhaustion from Heated Housing& Commercial Markets this will no doubt,  be received with a bit of mixed emotions.  If you,  like many in high cost housing areas,  took the route of a high leverage (90% LTV or greater) interest only or “neg am” ARM’s  you may be thinking GREAT, but I’ve lost 15% plus in market value in under a year and I can’t refinance even if I wanted to!

I’ve been in or around the Real Estate/Lending Industry for most of my professional life, I’ve worked commercial, multi-family and residential for much of this time in the California,  Arizona, Nevada,  Texas and Colorado markets and I can tell you this “cycle” is not the first and it will (barring  severe systemic reconstruction) will most definably not be the last.   Here in Sonoma, Marin, Napa and other Bay Area Counties this will be not unlike an annual visit from an unwelcome relative only this one occurs ever 8 to 10 years and can be far more painful, financially speaking.

Our Nation’s financial ethos has substituted creative thought and deliberate action for “speculation”,  National Economic Security for “piracy” ,  fiscal responsibility for “debt spending” and it has trickled on down the line to the average Homeowner and mostly,  in my opinion,  out of necessity.

I find the explanation for the recent Financial Market upheaval to be utter rubbish.  The “word on the street” is that “sub-prime lending” is the culprit which,  for me,  show’s either a deliberate (calculated) disregard for the facts or complete and utter ignorance of what drives the mortgage markets.

This is a seemingly complex issue that time and space doesn’t accommodate to lengthy a discussion so I will simply cover only a few of what I believe to be the most relevant.  Speaking specifically to high cost housing areas which pretty much includes the entire San Francisco Bay area as well as other major metropolitan areas the Residential Markets are driven by supply and demand.   The supply being increasingly limited and,  as well,  the underlying costs due to increased Government Imposition,  Land Use Limitations, Material and Labor Costs every increasing,  makes for a supply chain ever more expensive and decreasing in volume.  Coupled with a favorable Living Environment as well as other factors,  we have an ever increasing field of Buyers vying for the limited supply.  Now,  add to the mix and  for the past 7-10 years, historically (at time) low interest rates and we have a recipe for a robust real estate market!

Let us return to my earlier comment regarding our “Nation’s financial ethos”  for a moment to introduce another,  to me,  interesting component,  a microcosm  of where and how this plays out for the average homeowner.  On a National level,  saving rates are at an all time low (in fact, statistically they are barely measurable) yet the Economy,  the consumer spending component,  has been quite healthy.  Incomes,  adjusted for inflation are at mid-1980’s levels, I ask you,  where are the funds, which fuel this “boom”, coming from.   One word, Debt!  Refinance the home,  why not,  “…in the last year our house increased in value by $100k….”,  we can pull out some cash,  pay off those credit cards,  or better yet,  let’s put a Home Equity Line of Credit on the old homestead to buy that $50k SUV!   And,  we can do it because the Lender has a program with a 1% interest rate and we don’t have to pay for it,  it’s a “no point loan”!   Here,  let me help you place the rope around your neck!

I’d love to introduce the “Real Estate Investor/Speculator” into the mix,  but lest just say everyone knows one, however,  for now,   I’ll leave this subject for another time.  For now,  let’s just know that they don’t help and frequently,  in a market correction,  they actually make it worse!

The Federal Government (and many States) have made a mockery of the ideal we call “fiscal responsibility”.   They deficit (debt) spend without consequence,  Corporations debt spend through the aid of equity and bond markets and Banks have the printing presses of the Federal Reserve.  The average American  (and I don’t mean average in the realm of mediocre,…not at all) has no such backing,  no such cushion for a soft landing!  No you are forced into the requiem of  “il debtorato” out of necessity.  The Government is clearly aware of this yet has no interest in addressing it as they (and the system) answer to a higher God,…and it simply is not you!

The Mortgage Industry, simply put,  responds to a market conditions (demands).  Particularly in the case of “high cost” markets where the cost of the average home is well beyond the qualifying ability of the “traditional” mortgage product,  the venerable 30 year fixed rate mortgage.

I recall in the mid-80’s purchasing my first home in San Diego using conventional financing.  The  $79k first mortgage on a $90k purchase price seems paltry by today’s standards but the point worth noting is that fixed rates were at 15% and I was thrilled to take the ARM program as 12.25%.   By the way, the home,  sold in June of 2006 at $635k which was financed using an 80% LTV (Loan to Value) First @ 6.25% and a Home Equity Line of Credit (HELOC) 2nd at 8.25%.

Clearly interest rates have been at historically low rates,  though not the cause of high priced housing,  they’ve been an enabling factor.   Don’t think for a moment,  that my old home in San Diego would have ever seen a 600% gain had interest rates stated in the mid-teens!

The Mortgage/Banking industry has responded to the high housing costs by introducing products and/or modifying lending (qualifying) criteria.   It is possible (currently) to obtain 100% financing without even qualifying for it based on income!   Let me put it another way,…it is possible to obtain 100% financing on a home purchase with out having to document your ability to pay for it!  Add to this that the loan (Ist) is most likely a “Neg Am Adjustable” with a “teaser rate” of 1%  or  an “Interest Only”,  the Borrower will,  if the market continues to spiral upward,  be fine.  You live in the home for two years,  sell,  take the “tax free” gain on a personal residence and do it again!  Right?  It’s not unlike a pyramid scheme,…sooner or later, the fuel runs out!

Who looses?  The Fed surely doesn’t!   One might think the Financial Markets do,  they may fluctuate but in the final analysis, the market adjust for it in ways to detailed and time consuming to discuss here!  Just remember,  for the moment, this simple truth,…the asset is still there.    The Banks don’t loose, they end up with the property which the turn around and sell (and by the way,  a new mortgage is created!) and if the should loose value up to the 80% LTV bench mark,  they recover it from/by Federal Guarantees.  Yes,  secondary financing does get wiped out but that Lender gets to write it off against their operating income.  No,  the looser is the Property Owner who’s forced to “take the hit”!

Personally,  I think the greatest single contributor to volatility in the housing market is the concept of “forced housing”.   Particularly in high priced housing markets.  The idea of “entitlement” in this Country has been,  in my opinion,  has placed huge pressures on the Housing Industry and has placed Government in the capacity of micro-managing an industry and effecting market forces in a most adverse manner!   I know of no single Government program that has been financial successful, do you?   In fact,  it is functionally not possible to expect a entity that has no fiscal accountability to effetely participate in a structure, in any positive manner,  that responds to a market driven cycle that is  based  entirely on fiscal restraints.   Try not making a house or a car payment and see what happens!

We continue down this slippery slope: Congress who doesn’t participate in mandatory Social Security participation yet guarantees a “life time” retirement benefit “starting” at $15,000.  City Governments that extend fiscal responsibility for infrastructure costs on to Homeowners by leveraging their homes with “development bonds”. Or in a State who’s per student contributions and parcel bond/tax assessments for education are the highest in the Nation yet consistently delivers results among the lowest!  I don’t get it,…we actual tolerate Bond Initiatives to the electorate permitting parcel assessments on properties who may not have students “of age” and voted on by Voters that may not even own property or better yet,  live in the area were the funds are spent!   Can you think of “War For Independence” fought over a similar issue?

I can think of a comment by Ayn Rand in one of her magnificent books,  “Atlas Shrugged” and it goes something like this “…if you perceive a conflict in your observation, it’s only because you haven’t looked deep enough.”   After all,  there’s always a reason,  one just has to be willing to look for it and be prepared for the answer,  it is quite possible that it will not be to your liking!

Curtis C. Greco, Founder

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