patrick.net

Harm: “Nowadays, if you can fog a mirror…”

Credit does go in cycles and we are at the liberal part of the cycle. It does seem more liberal today than in prior cycles.. even at the top.

SactoQt: I was a loan officer in the mid 1970s. I never saw these loans used for anyone but younger, marginal buyers. That I did not see them does not mean that they were not used for sophisticated borrowers.

The negative amortization loans of the 1970s were designed for the purpose of enabling young first-time homebuyers to be able to better afford their starter home.

Perhaps I should call my loan broker and get approved for NAAVLP. Let me see... yep, I can fog a mirror. :)

Inflation was so high in the late 1970's and early 1980's that even with high interest rate it was not uncommon to have a mortgage completely paid off in under 10 years.

Zephyr
It's good to have someone with your knowlege because the various articles in the papers don't have much real expertise about these loans and seem to rely on opinion from unbiased sources like realtors, mortgage brokers, sellers, etc.

Maybe I tend to over-analyze... When I see variables and conditions, I tend to do "what-if" the product until it is "concluded" as too risky. Just maybe...

Zephyr, I really appreciate your views. They really help us debunk some myths.

In the early 80’s, there were still lots of assumable loans too, and people would say “I didnt buy a house, I bought a loan”, if they got a good rate.

It is would be nice too assume a loan with a lower fixed rate. However, I heard that the seller will be on hook if the buyer defaults.

Zephyr,

Thanks for the distinction on reverse vs. neg-ams. As I said, I'm too young to remember what went on in the mortgage markets in the '70s (though I do remember the late '80s), but it seems to me that lenders' use of IOs & neg-ams are much more widespread and reckless than at anytime in the past. 70% (since Jan. 2005) seems like an awfully big chunk of the market --especially for people who are stretching to the extreme edge of affordability payments-wise, or for flippers who are only using them in the expectation of fast appreciation..

Prat
You said that you called the bubble 2-3 years ago and feel a little embarrased. This should make you feel better. A couple of guys my husband works with were CONVINCED

Zephyr, what happen to negative amortization loans after the 1970's? Did they go away completely or did they just become unpopular?

Ooops!

Anyway. These guys were convinced the market had peaked 2 years ago, they sold their homes and moved their families into apartments. They've been waiting for the market to crash ever since. I guess the lesson here is that you truly cannot time a market.

With your investments, I favor a very diversified index-based portfolio:

10% smallcap value/growth index funds
10% midcap value/growth index funds
10% largecap value/growth index funds
10% international index funds
5% real estate tracking funds

Prat, are you a broker? That portfolio (with yearly rebalancing) will make any broker happy. :)

Anyway. These guys were convinced the market had peaked 2 years ago, they sold their homes and moved their families into apartments. They’ve been waiting for the market to crash ever since. I guess the lesson here is that you truly cannot time a market.

If they sold when the relationship between rent and price was out of whack then I believe they may not be in a bad situation, providing that they do not mind apartment living for a few years.

Inflation was so high in the late 1970’s and early 1980’s that even with high interest rate it was not uncommon to have a mortgage completely paid off in under 10 years.

Good point, Peter. Ties nicely into our discussion about "monetizing" the twin Debts and what the Fed's planning for us, inflation-wise. If you're expecting high inflation (assuming wages rise too, that is), then those NAAVLPs don't look so dumb. If wages DON"T keep pace, and much of that inflation is "off the books", however...

I'm sure they will end up in a favorable situation. But as you guys mentioned earlier, the wives may have something to say about the situation.

Question for the resident experts. Would high inflation occur fast enough to make a difference for those people who have Arm's coming due in the next year or two?

This might have been brought up before...

"If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children wake up homeless."

Thomas Jefferson

Question for the resident experts. Would high inflation occur fast enough to make a difference for those people who have Arm’s coming due in the next year or two?

Zephyr, we are waiting for your answer...

Peter
Your input is valued highly as well.

Your input is valued highly as well.

I still lack experience. As I have said before, I am learning a lot from this blog. Also, I am not too sure about the inflationary scenario at this point. I need some advice too.

My final post for tonight:

PeterP; I really stopped paying attention to those loans after about 1980. My experience with real estate after 1978 was solely as an investor (and homeowner).

SactoQt: Too bad about your friends getting out too early. I have not gotten out yet. I will wait to the last day. The declines are always slower than the boom in residential real estate. I sold last time in 1989.

The downturn is inevitable. The timing and severity are the unknown. Predicting the timing or severity with accuracy has great value. Predicting the inevitable is of no real value.

PeterP: Your quote by Jefferson fits with much of what occurred during the Great Depression of the 1930s. Fortunately the federal government passed laws that restrict those abusive powers.

Inflation is all but dead for the immediate future. Long rates will rise a little perhaps, but the world demand is lower than supply for almost everything. Pricing power is still weak. Further, corporate profits as a share of GDP are recently at record highs. Companies will give up margin rather than lose business at these profit margins. Short rates will likely spike in the next 12 months and then decline to about or below where they are now. ARMs will be cheaper than Fixed loans in the long run, but not in the next 12 months.

Harm: It is a dangerous condition that so many have these loans. Not because the loans are bad, but because so many people will mismanage their finances because of them. In the end most borrowers will be fine even with these loans. However, many will find these loans to be the straw that breaks their back.

I have enjoyed this site, and will return. Goodnight.

Predicting the inevitable is of no real value.

I concur. Let's try to turn our attention to timing and severity.

Even if I am to be proven wrong in the future, I still feel that the current situation is a great learning experience (what in life is not a great learning experience?). I have never seen the market in action with such attention and obsession. :)

I guess I have become a bit obsessed.......

Reguarding Bubbleheads contradicting themselves…. I think you are painting with a broad brush again

Jack - thanks for the reality check.
Discussions about macroeconomics make it too easy to let your mind wander and entice you into useless speculation (of the cognitive sort). What the hell was I thinking??

NAAVLPs remain a bad deal, even assuming high inflation (unofficial or otherwise), because amateurs are gambling they can either sell at a profit due solely to continued high rate of appreciation, or refi/roll-it over into another NAAVLP. When prices plateau/drop and rates go up, it's K-Y time...

Strength and honor

I guess I have become a bit obsessed……

Who isn't on the board? Even Face Reality cannot resist... ;)

Your quote by Jefferson fits with much of what occurred during the Great Depression of the 1930s. Fortunately the federal government passed laws that restrict those abusive powers.

I certainly hope so. What if we change the quote to

"If Americans ever allow The Bank to control the issue of our currency, first by inflation and then by deflation, The Bank will deprive the people of all property until their children wake up homeless."

Peter: That portfolio (with yearly rebalancing)

Yeah. Kind of a pain, but with index funds and rebalancing achieved by inflow rather than selling, you end up not getting slammed too badly. The guy I work with charges seventy five basis points, which is worse than VFINX's eighteen, but is pretty good overall.

I'd rather just own one vanguard-like passive fund that does the diversification/rebalancing for me with computers and near-zero overhead. But I poked around and didn't really find a fund like that. Any recommendations?

Cheers,
prat

Just to chime in on IOL's: interest only loans, some with negative amortization, were (I have heard) quite common in the 1920's. It was one of the things that lead to the bank failures.

Ha Ha, hellboy, the Chinese have been talking about that for quite a while already. So it is not a complete surprise.

Bond price is down (yield up), but nothing dramatic. Perhaps the market does not think that the re-peg will cause too much bond sell-off?

Prat, do you have Forex exposure other than the 10% international index fund?

Cattle, the government backing of Fannie Mae is a perception because

1) It is federally chartered
2) It is too big to fail (!)

I think early payment (pre-payment) has more to do with interest rate movements (http://tinyurl.com/atqo3). I am not expert in this either.

If the credit risk of Fannie Mae is not questioned, foreclosures should not matter much to the spread. Homeowners are supposed (!) to have equity to protected themselves in case of a downturn, right? ;)

Prat, I do stocks myself. So my brokers really love me even more. ;)

BTW, the Fidelity Target funds will rebalance your portfolio based on your expected retirement date. A pretty good idea indeed.

Fake P, the Chinese has demostrated that they will only revalue in "measured pace".

I think your money is probably better served elsewhere.

(Not investment advice.)

g lammert, great site!

The terrorist trolls are striking London again. I heard that no one was killed. Thank God.

Still seems a bit premature to short financials and housing all-out.

Shorting needs to be driven technically. It is not the time yet.

Any thoughts as to where?

Anyone has figured out what basket of currencies to which RMB will be pegged?

Veritas, I am looking at CHF, NOK, AUD, and NZD. How would you get Forex exposure? Would you trade them or would you hold them?

If CHF and JPY are already too high then leveraged carry trades may be difficult to implement.

"Too high" relative to other currencies.

Forget what I just said, what I meant is that it may be difficult to borrow CHF/JPY (low interest) to buy higher-interest currencies if CHF and JPY are going to appreciate because of this revaluing move. On the other hand, borrowing USD (higher interest) to buy CHF/JPY will incur a lot of carrying costs (interest).

Peter, I must cede to your wisdom

Do not cede to the void. I have no wisdom. Just words.

BTW, I am interested in those currencies because Norway, Australia and NZ are rich in commodities. And the Swissland has fondue. :)