patrick.net

Yeah. I wonder how much lower they can go? Sheesh. Someone predicted 3.75% and I am starting to believe it.

Yea, it may get there if things keep going like they have been, but I don't live by any crystal balls. I know folks that have been able to refi once or twice a year because the rates keep falling. For folks that carry a mortgage and deduct it on their IRS 1040, Schedule A that would be a beautiful thing........after taxes it's inexpensive money. I refi'd a property this year to a 4.25% with no points.

pkowen says

Yeah. I wonder how much lower they can go? Sheesh. Someone predicted 3.75% and I am starting to believe it.

They can go all the way down to the prime rate, which can go all the way to zero.

Banks can still make money through servicing fees and the like, plus the interest that they earn from customer's escrow accounts.

For a while you could get a loan with a 1% interest rate in Japan. I wouldn't be surprised at all if that happened here at some point.

What kind of a bank would want to lend money to someone at 1% interest for 30 years? Wouldn't the rates go up in this time, and deflation would turn into inflation (because of all the FED printing), and the bank would be stuck with a 1% loan? Do you think banks are stupid? The banks don't even want to lend at current interest rates, and the banks are now getting out of the mortgage lending business as they see rates going lower and lower. Eventually, the gov-t will be the lender of last resort for 100% of the mortgages, and, as foreclosures increase, they will be the owners of all the worthless real estate.

"Do you think banks are stupid?"

Is that a serious question or a joke? I don't know, would you consider loaning hundreds of thousands of dollars to people without verifying their income "stupid"?

"and the banks are now getting out of the mortgage lending business"

Which banks? Be specific.

dunnross says

The banks don’t even want to lend at current interest rates,

What does that mean? Banks set their own interest rates. Nobody tells them what rates to charge...

0% intrest = price of item way way too high ... at least 30% too high.
50% interest = price of item must be low.

I would rather buy a correctly priced home with expensive money vs. over-paying for a home with free money. The REwhores want the prices to stay as high as possible because that is their paycheck.

Tatupu, where have you been? I really think you should go back to your Econ 101 class, that is, if you've ever taken one. If banks were setting their own rate, the interest rate on a 30 yr mortgage would be much closer to 7%, than what it is today. The mortgage rate, in fact, is tied to the 30yr T-bill, or Libor rate, which sports an artificially low interest rate, because the foreigners are getting out of loaning us money, and the FED is taking over, buying up all the T-bills. But, by keeping the interest rates low, they are, inadvertently, killing all the mortgage business, so the banks are now, not only, effectively bankrupt (all their losses being hidden from balance sheet), they can no longer make any money making loans. So Bernanke is now loosing the battle with Kondratieff, he no longer has any control of the situation. Now, they are laying off gov-t workers, and the Deflationary spiral that Bernanke was trying to avoid for so long, has begun. Forget double dip in housing, there will be many more dips to come. There will be a long and painful road ahead.

dunross--

So it's your theory that banks are somehow forced to make loans at some arbitrary rate based on LIBOR or the 30 yr treasury? How is it that banks rates vary then?

That is pure bunk. Mortgage rates do generally follow prevailing rates like LIBOR or 10 yr treasury, but that's only because those represent the cost of money at that point in time. Banks are private companies (or public) and as such are free to loan out their money (or not to loan out their money) at whatever rates they deem appropriate.

Yes, they vary because the t-bill rate varies. It varies every day. Banks have very little liberty at charging, whatever interest they feel like charging, because, in a free market economy, the "price of money" controls the price of interest. But, now the FED has stepped in, artificially broke the balance, so the banks are no longer interested in lending money, just like the factories in the 70's were not interested in producing when Nixon implemented price controls on produced goods. So, just like we had shortages of goods for a brief time in the 70's, and they had shortages in the Soviet Union in the 80's, we will have shortages of loans for the next 10 years, or as long as the FED continues to manipulate the credit markets.

tatupu70 says

So it’s your theory that banks are somehow forced to make loans at some arbitrary rate based on LIBOR or the 30 yr treasury?

dunnross says

The mortgage rate, in fact, is tied to the 30yr T-bill, or Libor rate, which sports an artificially low interest rate

Thank you for asking the questions that have bothered me for a couple of years now! WHY do mortgage rates vary with Fed decisions, or LIBOR? I still don't understand the exact connection.

If a bank thinks inflation is going to go up, it should lend at a high enough rate to compensate for that inflation. Also, if a bank thinks a mortgage is risky, it should tack on points to compensate for that risk.

Given that inflation may rise, and that mortgages are very risky now, why would any bank lend for 30 years at only 4%? It just doesn't make sense. Except for the case where the bank can quickly dump the risk onto Fannie/Freddie/FHA, etc. Which may be exactly what is going on.

Come to think of it, jumbo lending is completely dead from what I hear. That would fit perfectly with the banks not lending at all in the case where they can't push the risk onto taxpayers.

On the third hand, Wells Fargo is offering 5% jumbo loans:

https://www.wellsfargo.com/mortgage/rates/

Why would they do that if they can't stick the rest of us with the risk?

Today, practically all loans being written by the banks are guaranteed by the FHA, so the risk to the bank is 0. However, as interest rates fall, it becomes less and less profitable for the banks to loan money, to a point where they just won't do it, even if there is no risk involved.

dunnross says

Banks have very little liberty at charging, whatever interest they feel like charging, because, in a free market economy, the “price of money” controls the price of interest

Supply and demand controls the price of interest. My point is that any bank that thinks the prevailing mortgage rates are too low (or risk is too high) is free to invest its money in other places. Those that did so in 2004-6 are very happy right now.

dunnross says

But, now the FED has stepped in, artificially broke the balance, so the banks are no longer interested in lending money

Again--there is no rule that sets the spread between 30 yr treasuries or 10 yr treasuries and mortages rates. If all banks/savings and loans/etc. decided to raise rates to account for their inflation expectations, then mortgage rates will rise regardless of what LIBOR or US treasuries are doing.

dunnross says

What kind of a bank would want to lend money to someone at 1% interest for 30 years?

...the kind that can borrow money at 0% and take no risk in the event of forclosure?

WHY do mortgage rates vary with Fed decisions, or LIBOR? I still don’t understand the exact connection.

It's a function of what it costs banks to borrow the money that they lend back out.

If the bank has to pay 1% to borrow the money, it has to lend it out at 3-4% in order to make a profit.

There is slight variation from bank to bank, but not much.

Given that inflation may rise, and that mortgages are very risky now, why would any bank lend for 30 years at only 4%? It just doesn’t make sense. Except for the case where the bank can quickly dump the risk onto Fannie/Freddie/FHA, etc. Which may be exactly what is going on.

That's part of it. The much bigger part is that they're *also* paying a fixed rate for 30 years in order to borrow the money.

They also get big up front payments with points and origination fees.

On the third hand, Wells Fargo is offering 5% jumbo loans:

https://www.wellsfargo.com/mortgage/rates/

Why would they do that if they can’t stick the rest of us with the risk?

Because even with the current forclosure rates, only about 1 in 30 mortgages will ever get to the point of foreclosure.

If the bank can get 70-80% of what is owed on the forclosures, they're still making pretty good profits.

Kevin says

dunnross says

What kind of a bank would want to lend money to someone at 1% interest for 30 years?

…the kind that can borrow money at 0% and take no risk in the event of forclosure?

WHY do mortgage rates vary with Fed decisions, or LIBOR? I still don’t understand the exact connection.

It’s a function of what it costs banks to borrow the money that they lend back out.
If the bank has to pay 1% to borrow the money, it has to lend it out at 3-4% in order to make a profit.
There is slight variation from bank to bank, but not much.

Given that inflation may rise, and that mortgages are very risky now, why would any bank lend for 30 years at only 4%? It just doesn’t make sense. Except for the case where the bank can quickly dump the risk onto Fannie/Freddie/FHA, etc. Which may be exactly what is going on.

That’s part of it. The much bigger part is that they’re *also* paying a fixed rate for 30 years in order to borrow the money.
They also get big up front payments with points and origination fees.

On the third hand, Wells Fargo is offering 5% jumbo loans:
https://www.wellsfargo.com/mortgage/rates/
Why would they do that if they can’t stick the rest of us with the risk?

Because even with the current forclosure rates, only about 1 in 30 mortgages will ever get to the point of foreclosure.
If the bank can get 70-80% of what is owed on the forclosures, they’re still making pretty good profits.

Banks borrow short term and lend long-term. If the interest rate on a short-term paper is 0% today, it doesn't mean that it will be 0% tomorrow, so the 1% 30yr mortgage loan stills put them in a huge risk of loosing money in the long-term.

Most of these large banks were taking a huge risk during the bubble. They had a 30x1 leverage on most of this paper, which means that they could only sustain a 3% drop in prices. But we all know that RE fell 30-40% on the average, which means that, if it wasn't for the elimination of mark-to-market, all these banks would be taken over by the FDIC by now. So the banks have lost 1000% (30% is 10x of 3%) of their total reserves, and skimming off 1% on mortgages in a housing market which is at a 50 year low in volume, isn't going to help them recuperate all those losses.

dunnross says

Banks borrow short term and lend long-term. If the interest rate on a short-term paper is 0% today, it doesn’t mean that it will be 0% tomorrow, so the 1% 30yr mortgage loan stills put them in a huge risk of loosing money in the long-term.

They do both, actually. A lot of it is short term, sure, but banks also borrow plenty long term.

Not that it's particularly relevant: very, very few people actually hold a mortgage for 30 years. Most people will refinance to take money out (typically at a higher interest rate), or will sell the home after only a few years. Combine that with various fees, and it's hard to lose money unless the property goes into forclosure and has to be sold at a steeply discounted price (which is, again, despite recent history, a pretty rare thing)

Very few will be able to, or for that matter, want to refinance, once interest rates turn around, and start heading up. And, since we don't expect much appreciation in housing for the next 20 years, there will not be so much in equity, either. In fact 25% of homeowners are already under water, and before the bottom in housing is reached, I would expect close to 100% of homeowners with a mortgage to be under water. So, most of the homeowners are really stuck in their houses for a long, long time. They can't refinance, and they can't sell. This is the capital trap which will be the driving force behind this long extended deflationary cycle.

dunnross says

Very few will be able to, or for that matter, want to refinance, once interest rates turn around, and start heading up.

Only 60% of homes in the united states have *any mortgage at all*, and another 20% are more than halfway paid.

Plenty of these people could, if they needed the money, take on a mortgage or refinance. It happens all the time.

dunnross says

And, since we don’t expect much appreciation in housing for the next 20 years, there will not be so much in equity, either.

You make no sense. In a 30 year mortgage, even with zero, or slightly negative appreciation, you would have substantial equity after 20 years.

dunnross says

In fact 25% of homeowners are already under water

25% of *people with mortgages* are underwater. HUGE difference.

dunnross says

before the bottom in housing is reached, I would expect close to 100% of homeowners with a mortgage to be under water.

Not likely. About half of all outstanding mortgages are the 15 year variety -- the type taken out by people who just needed money. They frequently aren't even taken for the full value of the home.

dunnross says

So, most of the homeowners are really stuck in their houses for a long, long time.

Only if by "most" you mean "about a quarter of". Most people probably don't consider a quarter of something to be "most", but OK...

Kevin says

They do both, actually. A lot of it is short term, sure, but banks also borrow plenty long term.

How can banks borrow long term? I've never heard of a 30-year CD, only 5 years at the longest, but maybe I don't know where to look.

I'm pretty sure there's no long term inter-bank lending, nor even long term borrowing from the Fed. So that would seem to leave the banks open to huge interest rate risk when they write these 5% 30 year jumbo mortgages. They can't sell them, so they have to hold them and suffer the risk that their own borrowing cost will soon exceed the interest borrowers are paying. So I'm still not clear why they're lending at 5%, at least in the jumbo market.

Kevin says

dunnross says

Very few will be able to, or for that matter, want to refinance, once interest rates turn around, and start heading up.

Only 60% of homes in the united states have *any mortgage at all*, and another 20% are more than halfway paid.
Plenty of these people could, if they needed the money, take on a mortgage or refinance. It happens all the time.
dunnross says

And, since we don’t expect much appreciation in housing for the next 20 years, there will not be so much in equity, either.

You make no sense. In a 30 year mortgage, even with zero, or slightly negative appreciation, you would have substantial equity after 20 years.
dunnross says

In fact 25% of homeowners are already under water

25% of *people with mortgages* are underwater. HUGE difference.
dunnross says

before the bottom in housing is reached, I would expect close to 100% of homeowners with a mortgage to be under water.

Not likely. About half of all outstanding mortgages are the 15 year variety — the type taken out by people who just needed money. They frequently aren’t even taken for the full value of the home.
dunnross says

So, most of the homeowners are really stuck in their houses for a long, long time.

Only if by “most” you mean “about a quarter of”. Most people probably don’t consider a quarter of something to be “most”, but OK…

99% of people with mortgages bought their houses after 1975. If prices go back to 1975 level, 100% will be under water. It's as simple as that.

No, I don't think prices should fall much below 1975 levels. After all, there was no bubble prior to 1975, and by 1975 prices have already corrected sufficiently, so the 1975 prices will, IMHO, will provide a sufficient support to stop the great fall.

In 1975, $30,000 wouldn't even buy you a condo in Detroit. But, now you can buy 2 brick houses for that price in the ex-Automobile capital of the world. As far as Lafayette is concerned, I don't think it has an ocean, nor does it get warm enough in the winter that any Chinese billionaires would actually want to live there, that is, provided that he ever heard of Lafayette.

Yes, every used house-owner in America will dream of having their house bought from them by a Chinese Billionaire, who just happened to pass through with enough pocket change, and his Chinese wife would just be enamored by that 2/1 Eichler in Lafayette, which looks just like the other 10,000 used Eichlers, but she just happens to fall in love with that Eichler, because it is that special Eichler owned by that special American Family in Lafayette.

dunnross says

99% of people with mortgages bought their houses after 1975. If prices go back to 1975 level, 100% will be under water. It’s as simple as that.

Ignoring the absurdity of this claim at face value (1975 levels? Really? Good luck with that one!), you're still wrong.

Not all mortgages are for purchases. Many many many people bought homes in the 50s, 60s, and 70s and refinanced multiple times since then. Many more people had their homes paid in full and took mortgages out on them.

dunnross says

In 1975, $30,000 wouldn’t even buy you a condo in Detroit. But, now you can buy 2 brick houses for that price in the ex-Automobile capital of the world. As far as Lafayette is concerned, I don’t think it has an ocean, nor does it get warm enough in the winter that any Chinese billionaires would actually want to live there, that is, provided that he ever heard of Lafayette.

I love this kind of absurdity too.

If the entire US goes through the kind of collapse that has occurred in Detroit, the last thing anybody would be thinking about is mortgages. We'd have civil war and someone would probably fire off a Nuke at some point. I can guarantee that nobody would give a shit how far underwater they were on their mortgage. I'm talking mad max or The Road here.

Of course, comparing Detroit in 1975 is amusing in and of itself. The late 70s were a period of a massive bubble in the Detroit area. After that crash, inflation-adjusted prices didn't return to 70s levels until 1996.

Even if we assume that land value is zero, it costs money to build a house. Construction costs for a 2000 square foot place with modern amenities is going to run somewhere in the $100-150k range. You're suggesting that prices are going to fall back to the high $30k range (the average price of a home in 1975).

There is absolutely no rational basis for such a claim. At $40k, cashiers at wal-mart could afford to buy multiple properties.

Maybe you're expecting massive deflation? As in, an 80%+ deflation? Sure, and then the whole country will collapse under the weight of its debt.

Anyone who believes such a scenario is actually likely to occur, but chooses to remain in the country, is an idiot.

Yes, deflation will be massive, because the bubble was massive (much bigger than even the one in Detroit back in the 70’s), and now the debts are also massive. So most of the income will be going towards servicing the debts, and there will not be much left over to pay for the Eichler. If you work for Wall-Mart, you will not have enough money left over from you take-home pay to save up enough to buy a scooter to take you to your work, let alone $20K (60%) required on a down payment for an Eichler. As far as the Nukes, I do agree that one healthy-sized Nuke can stop my proposed scenario from coming to fruition, but that Nuke might just fall on Lafayette.

Oh, BTW, Mr. Larry the Duck, your favorite web-site (redfin.com) is also now showing prices in your favorite city of Lafayette falling below the 2009 level:

http://www.redfin.com/city/9927/CA/Lafayette

Constructions costs are governed by how many unemployed construction workers are out there. With the absence of work, there will be many construction workers willing to do the same job for much less. Besides, Kevin, your "bubble era" mentality just come through loud and clear, but doesn't explain why I can buy a house in Detroit for $15K today which looks much better than you 3 litttle pigs house in Lafayette which costs $150K to construct.

dunnross says

Yes, deflation will be massive, because the bubble was massive (much bigger than even the one in Detroit back in the 70’s),

Only not. Are you just making stuff up? There are actual numbers, you know. Deteroit's late 70s bubble was one of the biggest RE bubbles on record, and it popped as deteroit's overall economy collapsed.

What you're suggesting, just so that we're clear, is that housing is *still* more than 80% overvalued -- without even adjusting for inflation!

And not just housing, everything. Apparently you also believe that the US has seen zero GDP growth since 1975 (technically negative, since there is still inflation). Nevermind the rise of the microprocessor, the personal computer, the internet...

I mean, really, this is just absurd.

Somehow, despite the fact that:

- The federal reserve can print as much money as it wants to fight deflation
and
- There is a real need for resources, both in the Us and abroad
and
- Actual productivity by actual companies doing actual business in america is up substantially

...you still think we're going to have 80%+ deflation?

So, answer me this then: Why are you here? You seem to be convinced that the entire US is going to collapse to an economy the size of Spain (a country in far, far worse economic shape than we are in, and with a much smaller productive base). Why would you stay?

You're either trolling, or a complete idiot. I'm going to hope for the former.

and now the debts are also massive. So most of the income will be going towards servicing the debts, and there will not be much left over to pay for the Eichler.

Hello? If our GDP drops to 1975 levels, 100% taxation could still not pay down the debts. We wouldn't be taxing to pay down the debt, we'd be defaulting. Do you even think before you write this stuff?

If you work for Wall-Mart, you will not have enough money left over from you take-home pay to save up enough to buy a scooter to take you to your work, let alone $20K (60%) required on a down payment for an Eichler.

Oh, but for some reason there will still be banks that can lend you 40% of the value of a home, and there will be bizarre loans where you put 60% down. That makes sense if you really know zero about finance.

If things were that bad *THERE WOULD NOT BE ANY BANKS*. We'd probably be on a barter system, assuming that we had sufficient ammunition to keep our stuff from just being stolen from each other. There wouldn't *BE* a wal mart, because nobody could afford to buy anything.

As far as the Nukes, I do agree that one healthy-sized Nuke can stop my proposed scenario from coming to fruition, but that Nuke might just fall on Lafayette.

No, we'd just all be dead. Even the "Chinese Billionaires" (most of whom don't actually exist)

dunnross says

Constructions costs are governed by how many unemployed construction workers are out there.

Holy shit, where can you obtain these free building materials from? Quick, how much does a brand new home in New Delhi cost? Funny, it doesn't seem to be based entirely on labor costs. How strange. Maybe they don't have the magic free building materials in India that we have here? Dunno. Maybe super math man can explain it.

Besides, Kevin, your “bubble era” mentality just come through loud and clear, but doesn’t explain why I can buy a house in Detroit for $15K today which looks much better than you 3 litttle pigs house in Lafayette which costs $150K to construct.

Because you can't. Please find me one house that is actually in decent condition in detroit for $15k.

I have actual family in the area and visit yearly. The places that you can find that cheap are the type that are fire risks, in neighborhoods where nobody lives except for roving packs of dogs and the random crack den.

But please, go on about how the whole country is going to have this happen.

robertoaribas says

Borrowing at 1% to lend at 4.25% makes for FANTASTIC profits today… BUT:

1. this is exactly what the savings and loans did, that crippled them all at once. Rates rose, and they were left highly exposed.

...

My inclination is that many people are aware of this, but choose to double down and pray. After all, they still have all these losses to wash off their books, so take the income today and worry about rates increasing later.

That's the best explanation I've heard yet. The banks are just taking the easy money now and leaving their risky future to be handled by yet more massive bailouts from taxpayers.

OK, this means I should short the banks. Carefully, but definitely.

Oh, and for context about how bad things are in Detroit...

- 50% unemployment rate
- Population today is about half of what it was in 1975 (everyone moved to the suburbs, where prices are actually holding up pretty well today, since they didn't have the bubble the rest of the country did)
- Highest murder rate in the country
- Highest property crime rate in the country
- Lowest education level in the country
- Lowest literacy level in the country
- Lowest population density of any city with a population larger than 100,000 people

and even then, the detroit *metro area* still has house prices that are, inflation adjusted, significantly higher than they were in 1975 (detroit proper is fucked)

But yeah, the entire country is probably exactly like the city of Detroit. Silicon Valley is exactly like it. Apple, Google, Cisco, Oracle, etc. are all in the exact same financial situation as the automobile industry. New York is exactly like it. Texas is exactly like it.

Yep, everyone is doomed.

Why do I sense a smell of "Hostility" on this blog. Might it be that some of you trolls out there, may not be having a such a good night's rest, after all, contemplating the remote possibility of prices going back to the 1975 level?

Here are a whole bunch of free bricks from Detroit:

http://www.zillow.com/homedetails/1183-Glynn-Ct-Detroit-MI-48202/88281594_zpid/#image=imgId%3DX1-IA1cs7afczomgsx_cycop

And, by the way, the free bricks come with a fairly well constructed house, something that your $100/hour construction workers in Lafayette don't have a solid clue about.

The reason why I compared market cap with GDP was because, in a world not filled with absurdity and bubble valuations (something you obviously know nothing about), the market cap and revenue of a company should approach parity. So, comparing market cap of Yahoo to GDP of Brazil, is, in fact an absurdity, in itself, for if, Brazil was actually a company, it's market cap would have been sufficiently lower than that of Yahoo.

Market cap is a function of equity (assets - liability) and earning multiple (valuations) and have limited relationship with revenue. Google generates about the half the revenue as Dell, yet is valued more than 8X more than Dell.

Brazil is the largest economy in the Southern Hemisphere and top 10 in the world with GDP around 600B in 2000 substantially more now. Yahoo peaked at around 200B market cap, so your facts are wrong here (like pretty much everything else.) Market cap is also a function of hoarding cash. Mircrosoft would be sitting in 200B in Cash and would have a higher market cap than Apple if they didn't release a portion of their equity.

Both me and Kevin are confused about your string of logic here.

Kevin says

They do both, actually. A lot of it is short term, sure, but banks also borrow plenty long term.

How can banks borrow long term? I’ve never heard of a 30-year CD, only 5 years at the longest, but maybe I don’t know where to look.
I’m pretty sure there’s no long term inter-bank lending, nor even long term borrowing from the Fed. So that would seem to leave the banks open to huge interest rate risk when they write these 5% 30 year jumbo mortgages. They can’t sell them, so they have to hold them and suffer the risk that their own borrowing cost will soon exceed the interest borrowers are paying. So I’m still not clear why they’re lending at 5%, at least in the jumbo market.

It's quite simple actually. Banks working capital is free flowing and not locked in. Even in a 30 year mortgage, they receive interest and principle, new working capital which would be deployed at higher interest rate in a higher rate environment so their borrowing cost and lending revenue will always be X+% if they manage it correctly. As long as their business is increasing and they are lending at a constant margin, they will never be upside down on average.

Banks that can't increase their working capital and roll over their capital fails.

dunnross says

The reason why I compared market cap with GDP was because, in a world not filled with absurdity and bubble valuations (something you obviously know nothing about), the market cap and revenue of a company should approach parity

That is patently absurd and it will take a very simple example to prove it to you. Company A has $5B in revenue with 5% net margin. Company B has $5B in revenue with 20% net margin. Should those two companies have the same market cap??

tatupu70 says

dunnross says

The reason why I compared market cap with GDP was because, in a world not filled with absurdity and bubble valuations (something you obviously know nothing about), the market cap and revenue of a company should approach parity

That is patently absurd and it will take a very simple example to prove it to you. Company A has $5B in revenue with 5% net margin. Company B has $5B in revenue with 20% net margin. Should those two companies have the same market cap??

If Company B has 20% net margin, they are probably lying about their income, and, unless their dividend yield approaches 6%, I would stay away from that company, just like buying an investment property in the BA which has no cash flow, no longer makes any sense. The point is, in a new era of deflationary economy, people are going to demand fixed income on their money, and companies which don't offer that, will see a severe decline in their stock prices. Since owning RE is a much bigger headache than owning stocks (not to mention the liquidity problem with RE), an investor would not touch any RE, unless it pays over 12% return. So, let me see if their are any math geniuses out there, that can tell me how much would a house in, let's say, Lafayette, have to fall by, in order to generate a 12% return for an investor.

dunnross says

If Company B has 20% net margin, they are probably lying about their income

Well done. Completely avoid the example. I made it a bit extreme to show you why you are wrong.