patrick.net

Re-post from end of last thread:

DinOR, Randy H,

If there’s a mortgage product out there that can actually help the BUYER for a change vs. banks and/or Casey Serins, hey, I’m all for it. However, given the timing and vagueness of the particulars, I –like Allah– am a tad skeptical until convinced otherwise.

Banks & mortgage lenders are generally not in the business of “charity” and if they are eager to push something “new & improved” (especially now as the tide is turning), I must assume it’s because it helps THEM until/unless I am convinced otherwise. The Bankrate article Allah posted (and granted we’re only talking one superficial relatively math-free blurb) left me with more questions than answers. For instance:

1. If the goal of mortgage accelerator loans is truly to pay off the loan more quickly, why are they structured as 30-year ARMs with a 10-year (!) Interest-Only period? Why not just set the maximum term to 10 or 15 years and make the minimum payment an amortizing one?

2. Based on the interest rate caps (21% for one of the 2 loans fetaured) and relatively low FICO scores required (660/680), can we assume you will be paying a considerable premium (points) over prime/LIBOR, plus significant kick-backs going to the originator?

If you can answer the above and demonstrate that these loans actually have a realistic chance of shortening the loan life and saving the buyer money over your 15/30-yr. FRM, then I’m all ears. Until then….

I remain skeptical.

I need to understand the specifics of the math and the risks better before I can fully endorse these products. So don't count me in the supporter camp yet.

I do come at this from a different perspective, which focuses on what's best for *normal* people versus what is the maximum return or minimum risk. My assumptions:

1. Houses are a form of personal savings. Home "equity" is really just a type of savings deposit, which will eventually be withdrawn and consumed or invested.

2. Most people are terrible at saving; almost as bad as they are at math.

3. Without owning houses, most people would save even less; probably far less. That is exactly what has been troubling about voodoo loans, they short circuit the savings effect.

4. Any product which helps people to own homes while preserving amortization -- even if it's not traditional US-style simple interest period-end amortization -- serves to support savings behaviors.

5. We need to support savings behaviors.

Please to notice I am NOT affiliated with this firm in any way, shape or form. The explantion in the link that follows IS very simplified and it's done that way for a reason. Firstly when you tell people they can pay off their home years early there's more than enough doubt to go around! Secondly, these "products" are proprietary and as Claire points out the competitive field is growing as we speak! Remember, you heard it here at Patrick.net first!

http://www.cmgfs.com/home_loans/cmghome/movie/player.html

I disagree with this. Savings account can only go up in value. Equity can go in either direction.

Categorically false. If I put $100 in a savings account paying 5%, and inflation is %7, then my savings goes down in value. That has been the historical attraction to houses -- that they match inflation over the long term.

I know, I know

The presentation is incredibly simplistic and again that's being done b/c "me too" firms are sprouting up like mushrooms! Hopefully it gives everyone that takes the time to sit through a 6th grade level presentation a working idea as to how these things work.

I’m not too sure about this, this is like saying that renters save less.

Renters do save less overall. This has more to do with the wealth & income levels of average owners versus average renters. The true-poor, as a class, are all renters with $0 savings by definition.

5. We need to support savings behaviors.

Ok, slight detour... feel free to ignore but I'd welcome any responses

We all know that savers are penalized the most by inflation and that borrowers are rewarded by inflation. Savers are in effect saying "I'm going to work for you now, forgo payment (in goods or services) and hopefully you'll pay me what I'm due when I want it down the line." If we lived in a barter economy, it's basically saying "Here's your side of bacon, I'll pick up the eggs you owe me next week." but instead we use money for the bookkeeping.

One of my more bearish suspicions is that youngish (

(repost due to greater than truncation...)

5. We need to support savings behaviors.

Ok, slight detour... feel free to ignore but I'd welcome any responses

We all know that savers are penalized the most by inflation and that borrowers are rewarded by inflation. Savers are in effect saying "I'm going to work for you now, forgo payment (in goods or services) and hopefully you'll pay me what I'm due when I want it down the line." If we lived in a barter economy, it's basically saying "Here's your side of bacon, I'll pick up the eggs you owe me next week." but instead we use money for the bookkeeping.

One of my more bearish suspicions is that youngish (less than 40) savers like myself are saving when labor is plentiful (boomers and now China and India coming online) and we'll be wanting to get paid back in goods and services when labor is less plentiful (due to the aging of society) when normalized by the total population. There's going to be this wave of boomers receiving SS checks from the government (maybe); they'll be wanting goods and services and thus my saved dollars will be competing with their printed dollars.

I'll probably save anyway, but deep down inside, I have a nasty feeling that the dollar bears are right and that maybe I should be more bullish on anything linked to a harder value. Can one buy futures in 40 (wo)man-Hours?

Sorry for the tangent. Back to your mortgage debate...

What we're all glossing over is the fact that if you can pay your home off in 8-10 years vice.......uh, never you are in essence paying about 3% to borrow the cost of funds.

Believe me, no one on this blog is more bearish on housing than I am! I'm not advocating everyone run out today and buy some overpriced POS just so you can get one of these loans. What I am saying is if you have found an entry point that makes sense for you and your financial situation do some research and learn as much as you can about these accelerator programs!

Many here are still young enough to have a trad. 30 yr. FRM work for them. I'm not in that crowd. Signing up for that means it would be paid off about 5 years after I'm dead (probably through life insurance policy) at which point that means I would have been making mort. payments from age 28 to 69 (father's passing). Assuming I stay current on my policy this means I will be able to pay off my house posthumously. Great.......

Allah

I don't know what to say. You're wrong, but I don't have the energy to demonstrate precisely why just so you can ignore it like you did with sticky price phenomenon. So fine, despite the fact you actually just demonstrated my point for me without knowing it, you're right: all asset classes behave exactly the same under inflation. I wish I hadn't wasted my time figuring out inflation correlations to asset prices. I could have just asked you.

DinOR

...case-in-point.

CG,

Interesting.

WRONG!

but.......interesting.

What they don't share in the tutorial (for proprietary reasons) is that you establish a reserve account of about 1/2 a month's income. This is what allows you to have a more meaningful impact on the UNPAID balance!

(I just love doing the whole "Wrong but interesting bit" sorry)

--Randy
1. Houses are a form of personal savings. Home “equity” is really just a type of savings deposit, which will eventually be withdrawn and consumed or invested.

--Randy
Categorically false. If I put $100 in a savings account paying 5%, and inflation is %7, then my savings goes down in value. That has been the historical attraction to houses — that they match inflation over the long term.

Allah, I think what Randy is saying is that repayment of PRINCIPAL which builds homeowner's equity is what constitues the "savings" for the mortgagor. I don't think he meant that "equity" in the general sense (house prices) cannot go down. On this point, I think we can all agree. Of course, if/when house prices do fall, this rapidly destroys any repaid equity and can even leave the borrower with NEGATIVE EQUITY, so Allah's point about "equity" being risky/fungible is also valid.

As far as a savings account (or pretty much any savings/investment vehicle) losing value due to inflation erosion, this is always a danger, true. This is why we've had numerous discussions on if/how/why the CPI and interest rates are being manipulated, and how to shelter one's savings from the ravages of inflation, publicly acknowledged or not. However, the downside risks and scale of that any wealth destruction is far lower for a savings account than a bubble-inflated house.

CG,

Don't worry, I'm used to it. Many people say that when first being exposed to the concept. "Oh, this is one of those Bi-Weekly programs!" No, it isn't. This is totally different. It's a LOC vice a closed ended mortgage arrangement.

(In truth I DID try a bi-weekly in the early 90's and the implementation was disasterous!) They were taking money out of my account before the agreed on dates and it was done in a very primitive way. Well, that was the early 90's. Even had I stayed the course it would have only resulted in knocking off about 6 or 7 years. Not exactly earth shattering.

Equity has a precise definition that comes from the accounting discipline, which is why it has been applied to houses.

Assets = Liabilities + Equity
or
Equity = Assets - Liabilities

Paying principal on an amortizing loan reduces Liability value. Asset value moves independently as a function of the market. In accounting it is kept at book for real estate, and only marked to market when sold.

But from the home owner's perspective, they don't have equity in the traditional accounting sense. They have independent claims on an asset and debt obligation. The owner, not being a business, can't "package" their equity. It's just an unrealized savings account, or Asset they can sell to pay off the remaining Liability and keep the change.

Since homes are valued in dollars, but don't correlate to the movement of dollar values themselves (ie, inflation), interest in a house's asset value (called home equity) have provided a natural long-term hedge against inflation.

Erosion of home "equity" has occurred as voodoo products have allowed people to borrow heavily against their unrealized future savings balances, which themselves depend upon an expected future market value priced in dollars. Dissavings. Previously, houses provided a mechanism to prevent dissavings.

All I assert is that any loan product that encourages savings, and discourages dissavings, is on the balance a good thing for most normal people (none of which are normal posters here almost by definition; normal people don't post on bubble blogs arguing about stuff like this).

The true-poor, as a class, are all renters with $0 savings by definition.

I thought the true-poor are squatters who will eventually be awared the houses. :)

Allah,

It seems your philosphy is that “it always goes up”.

Support that statement or our discussion is ended. Please describe precisely where I ever stated such a thing, or retract your assertion.

Oh, and Randy's points about U.S. savings rates:

3. Without owning houses, most people would save even less; probably far less. That is exactly what has been troubling about voodoo loans, they short circuit the savings effect.

Allah, Randy is not disagreeing with the rest of us here. He is pointing out that paying off an amortizing mortgage traditionally USED TO BE a form of 'forced savings', but no longer is, due to our wonderful new paradigm revolving neg-am/IO loans.

Renters do save less overall. This has more to do with the wealth & income levels of average owners versus average renters. The true-poor, as a class, are all renters with $0 savings by definition.

Sorry, Randy, but I cannot defend you here. This was probably true in the past, but no longer:

http://www.financialsense.com/Market/wrapup.htm

One of the sources for rising consumer debt has come from home-owners taking out home equity lines of credit (HELOC) to extract equity from their home. The increase in home equity extraction has lead to a negative U.S. consumer saving’s rate, with lower-income homeowners seeing the largest decline in their savings rate over the past couple of years. Renters currently have a 3% savings rate, homeowners with no HELOC have a 0% savings rate, and homeowners with a HELOC have a NEGATIVE 16% savings rate.

You guys are absolutely not going to believe this but part of the reason I was distracted is when I went to log on this morning I found my desk in a puddle! Yes, a puddle.

Seems my high end, upscale (thankfully rented) condo has sprung a leak! Near as I can figure the gutters are clogged and water is seaping back in under the eaves and into my home office. No big. I just felt obligated to explain. If you notice a sudden lack of posting, assume that I've been electrocuted.

Sorry, wrong link:

http://www.financialsense.com/Market/cpuplava/2006/0809.html

HARM

homeowners with no HELOC have a 0% savings rate

That statement is inconsistent if you accept that paying an amortizing mortgage is a form of forced savings.

I clearly agree, and have stated over and over, that home owners are dissaving at an increasing, and alarming rate. If not for the true-poor, I would also agree that renters are about equal savers to home-owners in this bubble period.

Allah,

Your (and I hesitate to use the term but for lack of a better one) mortgage payment is always paid FIRST! This assures you don't get into arrears etc. What the tutorial doesn't explain is that is that the "equity" you've built up IS NEEDED to implement the next phase of the "buy down". So you do tap into it but it's again needed to put a bigger dent in the 80% part of your mortgage!

Yes, you can tap into it but you'll get monthly statements that will clearly exhibit when you're getting off kilter.

That statement is inconsistent if you accept that paying an amortizing mortgage is a form of forced savings.

I'm sure the article was referring to non-mortgage savings. Even so, what % of new/active mortgages today are still amortizing products? I don't have the national stats handy (it might still be the majority), but it's down to about 20% in California. Add to that the fact that any owner "equity" (in the form of repaid principal) can easily evaporate if prices fall, and you have a very risky, illiquid form of "savings" indeed.

One other thing regarding mortgage accelerator programs:

I've looked at a lot of them, like I say the "me too" firms are coming out of the woodwork. While they do vary somewhat in approach they ALL provide for ongoing mentoring and consulting. This another imortant difference. Unlike the "hit and run" sales we've all been exposed to, this is a long term commitment on the part of the person that sold it to you!

Most, scratch that ALL mortgage lenders we've all had to deal with in the past basically just had you jump through hoops to get the loan and once you did it's like "Oh and good luck paying on that" as you walk out the door.

The rain has subsided so the growing leaks seem "o.k" for now.

CG,

I'm sorry, what was the question again? I'm literally trying to wipe down my desk and computer as we speak, so please make it simple. For MY sake?

I do not how amortizing a mortgage can be considered saving at all. If the "money" cannot be liberated WITHOUT a loan to buy sushi, it is not saving.

HARM

We agree. The problem isn't that people use houses to save. The problem is that has become perverted into a form of future price speculation to fund current consumption, which is very dangerous.

I think well over half of new mortgages in the past couple years are non-amortizing, more so in the bubble areas. These people are _not_ saving at all. They are just gambling by taking money out of the ATM as a credit card cash advance, with the illusion of hitting 00 before they need to cash out.

CG,

Maybe I'm not explaining this correctly. The idea is to have the home paid OFF within 8-10 years, period. At that point one can begin in earnest to look for a 2nd/vacation/retirement home.

Hey I just had a thought! People running around during the bubble buying up these vacation homes before they've even built up any paid equity in their primary residence! How f'd up is that?

@Randy,

Yes! That's what I was trying to get at. There really was no disagreement. "People, what we've got here is failure to communicate..." :-)

Allah, I know you mean well, but please slow down and read more carefully next time.

As far as inflation, that is another story. $100k in savings will buy you less, but $100k in equity will buy you just the same. This is why you have to leave inflation out of the picture when comparing the two.

Huh?

Allah

Your position is clear. Wrong on multiple counts, but clear.

My part in discussing this with you has ended.

If you wish to have a debate I suggest not making leaps and putting words into someone's mouth for the purpose of demonizing them. "It only goes up" is a clear attempt to cast me as a realtor. In a previous debate you openly accused me of being a realtor. Once shame on you. Twice shame on me. Welcome to my RSS filter.

Allah,

The whole point of "owning" a home is in addition to providing shelter it will (Lord willing) one day be paid off, no?

Traditionally, in a "normal" market homes appreciate at inflation PLUS a couple of points. This has been true (up until recently) since before the Civil War. Most of us hope we aren't so far gone that we can't again revisit those norms. You'll have to forgive us if we don't readily dismiss 200+ years of data just b/c of the last 4 years of unprecedented hysteria.

goober,

Yeah I remember Jerry Spence. He would never cut in the financial world especially after the garbage he filled Christopher Darden up with.

"Justice is this baby crying, screaming in a burning building" And you MUST rescue it! (Lotta good that did huh). Try saying that garbage at a shareholders meeting? But I must admit he always looked so cool in his leather tassled jacket from his digs up in WY!

Anyway, the point is, unlike "casinos" these firms are not the actual lenders. We should view them more as "mortgage service firms". They don't like the idea of being a debt slave for "30 to Life" any more than you and I do! Hell, it's their whole marketing strategy.

A better way of saying that is $100k will buy you the same no matter where it comes from, whether it comes from savings, equity, or finding it buried in the wall of you house.

So you are saying equity equals saving?

DinOR, Randy and allah,

My read on these loan products boils down to this - you set up a HELOC that is essentially like a holding account for your paycheck. Any funds you don't spend on normal expenses gets dumped into your mortgage balance. This way, if you are otherwise fiscally undisciplined but generally spend less that you earn net (how many Americans really do this?), this is essentially an automated form of prepayment. Am I correct on this?

If so, here's my question: is the true advantage here that your HELOC balance remains near-zero, so that you don't usually pay any HELOC interest? Otherwise it seems that there is the added burden of paying interest on the HELOC in addition to the "real" principal.

Allah Says:

> Randy, I think I explained myself pretty clearly. I’ll explain
> it in the finest detail I can and anyone who wants to disagree
> or agree with me or even make what I am saying more
> clearer, feel free to chime in.

Randy said:

> Home “equity” is really just a type of savings deposit, which
> will eventually be withdrawn and consumed or invested.

I agree with Randy that home equity is like a savings account, but I would make a change to his statement and write “which might eventually be withdrawn” since it is possible for someone to buy a home (say a little place in the Inner Richmond for $1.3mm that sold for $345K 10 years ago) with a 20% cash down payment, pay down the loan every month and still die years from now without a penny of equity. I think that Allah’s point is that if I put $260K in to FDIC insured CDs I will always have at least $260K, while if I buy a home and put down $260K I may not have any equity in 5 years even after 60 months of forced “savings” with a fully amortizing loan…

My read on these loan products boils down to this - you set up a HELOC that is essentially like a holding account for your paycheck.

Two things:

1) Can a HELOC be revoked?
2) What to do when the HELOC floating rate becomes higher than the fixed mortgage rate?

Speaking of home equity, it looks like the vultures are starting to circle in Boston:

http://business.bostonherald.com/realestateNews/view.bg?articleid=165149

"Housing market ‘upside down’ : More homes selling below purchase price"

And in a real estate market where home values are declining, it’s leaving some people who are trying to sell their homes facing a jam. Home owners whose mortgage covers most of the original purchase may walk away from a sale owing the bank a big chunk of change.

After heading to the West Coast and the Midwest in search of business, she returned, and suggests Boston looks like a fertile market once again.

I think that Allah’s point is that if I put $260K in to FDIC insured CDs I will always have at least $260K

Er... did you mean at least 100K?

Speaking of home equity, it looks like the vultures are starting to circle in Boston

If I were those vultures I would take a rest now. Why should I keep circling when my prey is becoming MORE dead by the minute?