patrick.net
An Antidote to Corporate Media
1,365,240 comments by 15,735 users - HeadSet, Maga_Chaos_Monkey online now
Banks are stupid for issuing fixed-rate mortgages when rates will increase.
2012 May 30, 5:07am 4,747 views 12 comments
« First « Previous Comments 11 - 12 of 12 Search these comments
Japan's rate is about 2.4%. Of course it can go lower.
I know there are lots of people on this board that still think Treasuries are a "bubble" that will pop any time, and interest rates will go up any time now. I have posted on this board for years and I've always been right about interest rates. I will continue to be right.
tdeloco
@
2012 May 30, 5:32pm
Or, we could always turn “Japanese†and hold rates down for 15 more years!
We are not Japan. Japan always had a trade surplus for 3 decades (1981-2010), ending up with $1.3T in foreign holdings. This allowed them to keep borrowing at ultra-cheap rates. Well, those who follow MMT will probably argue that the central bank (BoJ) has good control over the rates. Interest rates may never go up. Fiscal repression is the name of the game.
Japan has a large trade deficit in 2011, so things are different now. If their trade deficit continues, their debt will continue to increase exponentially. They may resort to just printing money out of thin air. Either way, we cannot rule out a massive devaluation of the Yen (even if the rates remain repressed).
What puzzles me is why they didn't use all that money towards debt reduction. Japan's debt-to-GDP is approx 233%, but their massive foreign holdings can bring that down to a net-debt of approx 130%. However, I don't think they can dump their foreign holdings without strengthening the yen, and therefore widen their trade deficit.
« First « Previous Comments 11 - 12 of 12 Search these comments
When interest rates go up to 5.5% from 3.5% banks will be losing a full 2% on their fixed-rate investments. Why did banks ever issue long-term fixed-rate mortgages based on the short term decline in interest rates, did they forget that they are in the business of managing risk? These banks, or the people who purchased these mortgages after the fact, are in for huge losses once interest rates increase. Interest rates may not go up next year or in five years, but in ten years interest rates will have to restore to their average.
Can the banks not remember 40 years ago when interest rates did something other than decline? Fixed-rate mortgages are amazing for bankers when interest rates are falling because the bank gets a higher return until the mortgage holder refinances. When interest rates increase, a fixed rate mortgage is a banker's enemy. Banks will steadily lose money holding on to these low interest fixed-rate investments.
With the federal funds rate a 0.25% banks have to know rates cannot possibly go any lower. This means that rates will either stay the same or increase, not many other options. So given the circumstances, it would be irrational to issue fixed-rate loans if you were a bank, there is no benefit. Are banks so used to getting bail-outs that they don't even understand the core of their business model, risk management?
This is a prime example of moral hazard. Banks know they will get bailed out so they stop caring about the longevity of their financial transactions. The very fact that banks are not only providing variable-rate mortgages right now says they don't care what happens after the mortgage is sold to Fannie or Freddie. They think “As long as the investment isn't on my books, I don't care.” And who is buying/backing the buyers of these faulty investments? Yep, the federal reserve. Wow, it sure comes full circle now.
I hope taxpayers are ready for more bailouts. Or, we could always turn “Japanese” and hold rates down for 15 more years!
#housing