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Refinancing to a 15 or 30 year mortgage ???

Updated on July 19, 2012

Refinancing Considerations

Over the course of the last few years I have received numerous calls from clients asking me whether or not it makes financial sense to refinance their mortgage as a result of this unprecedented low interest rate environment. And in many cases the answer is clearly yes. Clearly the most significant factor in this decision is just how much lower your interest rate will be. In cases where the rate will decline nominally, it may not be worth the closing costs on the new loan.

When looking at refinancing there are various factors to consider. When looking at total cost, sometimes it may pay to refinance with the same lender even if the quote you receive is a slightly higher interest rate. For example in the State of NY when refinancing with the same lender, you are not subject to pay the mortgage recording tax when utilizing the same lender. That can be a sizeable expense, as much as 2% of the loan.

One major consideration is often the decision of whether or not to refinance from a 30 year loan down to a 15 year loan. While on paper this may look good for those who clearly have the cash flow to handle a higher monthly payment. However in some cases you want to look a bit past the amortization tables and the total cost of a loan over 15 years. When making this decision it is wise to think hard about things like your income or even employment stability. Life can sometimes have a habit of throwing curveballs at us when we don’t expect it. If you work in a field like sales that has many inherit highs and lows, you shouldn’t plan on the basis of your best year but rather your worst. If you feel you’re in an industry that may be somewhat suspect and your employment may be in jeopardy down the road that should weigh on your decision. It may not always be wise to lock yourself into the higher monthly cash flow. In cases like these it is worth considering taking a 30 year loan and simply paying extra monthly principal payments to equal the same result of a 15 year loan. If you make simply one extra payment per year on a 30 year loan, you’ll eliminate approximately 7 years off of the life of the loan, bringing you to a 23 year mortgage. Often this approach can give you the benefit of reducing the life of the loan and total amount paid on the home, while still giving you the flexibility to adjust in a time of crisis at a meager difference in interest rates. Virtually no mortgage company penalizes consumers for prepayment of a loan anymore. However in order for this strategy to work, one has to be disciplined enough financially to make the extra principal payments during prosperous periods. Fortunately, in this electronic era we live in today, this can easily be automated with your lender via automatic monthly payments.

It is generally a good idea for individuals of higher net worth to carry a loan in a low rate environment in order to deploy capital to areas that yield a greater overall return. Yet for the average middle income American, this is not usually the case for reasons related to behavioral finance. Some of these issues where outlined in an earlier article linked to below.

http://landmarkwealth.hubpages.com/hub/Should-I-Pay-off-My-Mortgage-Early

While paying down debt is a great idea longer term for the average American, this must be balanced with the need for some degree of liquidity. In some cases, committing to a higher payment is not always the best idea. Consider giving yourself the flexibility to reduce the monthly expenses, while still being fiscally responsible in the area of debt reduction when you can be.

It’s always important to consider your financial circumstance on an individual basis, and not utilize general advice. What may be suitable and clearly sensible for one individual, simply may not apply to you.


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    • SidKemp profile image

      Sid Kemp 4 years ago from Boca Raton, Florida (near Miami and Palm Beach)

      Thank you for making the issues clear and encouraging each person to think through his or her own concerns. Voted up!

    • LandmarkWealth profile image
      Author

      LandmarkWealth 4 years ago from Melville NY

      Your Welcome

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      Don't you think that the due on sale clause is unfair.

      Or at least there should be a recalculation of the interest paid on a fully amortized 30 year loan that has only gone ten years, or any number less than 15 years. These loans when paid off because of a sale can look more like interest only loans, because the principal payment is so small in the first half of the loan.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      Not Necessarily. Keep in mind that a bank extends credit not just based on the underlying asset like a home...but also the credit worthiness of the borrower. Without that clause, the transfer of liability freely by the borrower could allow for transfer of the debt to a less than credit worthy individual that could expose the bank to greater liability that they would not have otherwise taken on.

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      The banks have the right to quality the new owner, but my point is that the banks make a windfall profit when the loans don't go full term.

      The interest is calculated on the length of the loan, in this case 39 years. But, when the loan is paid off prematurely, those interest payments made the loan more like an interest only loan, or a loan with a balloon payment, but not calculated like a balloon payment loan.

      My point is that there should be a recalculation on the loan when it is terminated early, especially when it is forced by the bank. The calculation should be to use the interest rate with the real term instead of the thirty years. That interest should be compared with the interest already paid by the borrower, and subtracted from it. The difference should be returned to the borrower.

      Thanks

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      The banks would not necessarily have the right to qualify a new borrower. That would have to be specified. You also have to realize that banking is a business on both ends of the equation. Think about it, if we could allow assignment of a contract at will, then none of us would sell our homes outright in a traditional sense in rising or stable rate environments. We would simply draw up a contract and assign the loan to the new buyer. Nobody would ever go back to the bank and apply for a mortgage unless rates were declining. So when rates are declining, banks are issuing new notes for less revenue and tighter margins. When rates are rising there is no loan demand, and the banks make no money. If we operated that way…we’d wipe out the banking system and crush the M2 supply of money. Whether we like it or not…we depend on the banking system for our monetary system to work.

      With regard to the recalculation of interest. Put yourself in the banks position…how quick would you be willing to extend credit if you had a loan portfolio that was so easily subjected to recalculating revenue based on periods of shorter loan duration. That increased risk would have to be offset by another revenue stream. Perhaps even higher closing costs…higher lending rates overall…etc.

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      You wrote

      The banks would not necessarily have the right to qualify a new borrower.

      bmOC

      That is the way that the due on sale clause is in CA. And the bank is not obligated to call the due on sale clause.

      ====================

      You wrote

      That would have to be specified. You also have to realize that banking is a business on both ends of the equation. Think about it, if we could allow assignment of a contract at will, then none of us would sell our homes outright in a traditional sense in rising or stable rate environments. We would simply draw up a contract and assign the loan to the new buyer. Nobody would ever go back to the bank and apply for a mortgage unless rates were declining. So when rates are declining, banks are issuing new notes for less revenue and tighter margins. When rates are rising there is no loan demand, and the banks make no money. If we operated that way…we’d wipe out the banking system and crush the M2 supply of money. Whether we like it or not…we depend on the banking system for our monetary system to work.

      bmOC

      Perhaps you might look at the history of loans before the due on sale clause was used. In fact, in rising interest rates the only real way of selling a home was with the residual low interest loan of the seller.

      The All Inclusive Trust Deed was used in 1980 when the interest rates were at and above 18 percent. Without that there would have been hardly any home sales. apartment house sales were only possible by the owner carrying paper, and using the AITD.

      ============

      You wrote

      With regard to the recalculation of interest. Put yourself in the banks position…how quick would you be willing to extend credit if you had a loan portfolio that was so easily subjected to recalculating revenue based on periods of shorter loan duration. That increased risk would have to be offset by another revenue stream. Perhaps even higher closing costs…higher lending rates overall…etc.

      bmOC

      The banks know very well that only a few of their thirty years loans will ever go the length. The banks are unduly profiting from their inclusion of the due on sale clause. They took us for a ride during the sub prime bubble with very poorly drafted loans. They included negative amortization, balloon payments, and the variable loans were thinly disguised Interest Only loans.

      Even with the recalculations that I suggested the banks will still have made a fair profit for their investment. But under the no recalculation due on sale, they make a windfall profit, as they can take that profit and domino it into a new loan. If you would recalculate the loan for the effective interest rate it would exceed the interest rate of the loan.

      The people that got the loan were never made aware that they would be effectively paying more than agreed, if the due on sale clause was invoked by the bank.

      Under the UCC 2-401 or 3, I don't remember which, the standard form bank contracts were held to be unenforceable, because they were not negotiated, it was take it or leave it.

      Thanks

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      That may be true in California. But if you want some kind of Federal provision banning due on sale, you would have to have a national provision granting banks the right to protect the borrower.

      Historically home sales turnover in rising rates even faster. Rising rates historically correspond to economic expansion. That is why the duration on GNMA funds are so low even when rates are rising. As the economic environment improves people move upward and often sell a home to buy a larger home. The average American only stays in a primary residence about 5-7 years or so. However, if we see expansion and the due on sale provision did not exist…what possible reason would I have to go to a bank when the seller could simply transfer the note. Furthermore, in reality that would constrain the central bank’s ability to exercise its influence via monetary policy. Since theoretically, home loans, business loans etc would all be easily transferable. Therefore the changing of the discount rate and Fed open market operations to affect interest rate changes would be less impactful.

      “The banks know very well that only a few of their thirty years loans will ever go the length”

      That’s actually the point. According to the US census, the average American moves every 5-7 years. In doing so, they close out home loans quite often. Which again is why GNMA’s have such short duration portfolios and are less interest rate sensitive. Because a large percentage of loans are never held to maturity. So how then does a bank stay in business if they can’t constantly extend credit. If I can just assume your note, than the bank is cut out of the loop and that same note can be passed to 10 different people. Sounds nice until we realize that banks are accountable for creating about 90% of the M2 money supply. So without them…we’re in trouble. There is nothing more dangerous than a banking system that is about to collapse. Sucking profits from the banking system collapses the money supply.

      “Even with the recalculations that I suggested the banks will still have made a fair profit for their investment”

      You can’t possibly know what their profit margin is unless you know what their operating expenses are. Just the new Dodd-Frank compliance alone is an enormous expense. Profit and loss is not dictated exclusively based on one variable. You can certainly rest assured that if you came to me to borrow money, and I had to factor in the risk that the liability was transferrable to a theoretically endless number of people…there would be significantly higher added cost to cover that liability. You’ll pay for it somewhere. There are no free lunches. If you loaned your friend your car, and he then lent it to someone else, who then lent it to someone else…would you be ok with that ???

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      More simply put...a mortgage or any form of credit extension is a contract between two parties. I am not to keen on the idea that a borrower, who represents the liability in the equation can simply transfer that liability which represents an asset to another party (in this case the bank) to another 3rd party. If someone doesn't like the provisions of the loan agreement they can simply not borrow the money. I certainly wouldn't want a third party selling my assets for me unless I specifically appointed them to do so.

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      You wrote

      That may be true in California. But if you want some kind of Federal provision banning due on sale, you would have to have a national provision granting banks the right to protect the borrower.

      bmOC

      How about the Uniform Commercial Code holding it unenforceable?

      -------------

      You wrote

      Historically home sales turnover in rising rates even faster. Rising rates historically correspond to economic expansion. That is why the duration on GNMA funds are so low even when rates are rising. As the economic environment improves people move upward and often sell a home to buy a larger home. The average American only stays in a primary residence about 5-7 years or so. However, if we see expansion and the due on sale provision did not exist…what possible reason would I have to go to a bank when the seller could simply transfer the note.

      bmOC

      This scenario worked and existed prior to the due on sale clause creation. And it shouldn't make any difference to the bank as they were committed to a 30 year period.

      ---------------

      You wrote

      Furthermore, in reality that would constrain the central bank’s ability to exercise its influence via monetary policy. Since theoretically, home loans, business loans etc would all be easily transferable. Therefore the changing of the discount rate and Fed open market operations to affect interest rate changes would be less impactful.

      bmOC

      It is not like that mechanism helped during the sub prime bubble. The FRB kept the interest rates artificially low so that the banks could keep the bubble going. These loans were bubbles waiting to burst, as they violated every fundamental of conservative loans. They didn't have the upfront equity, the people getting the loans were usually not qualified to carry these loans, as any increase in the variable loan rate would have caused them to default.

      All the safeguards were down, and the FRB, Fannie and Freddie were all in on the scam.

      --------------------------

      You wrote

      “The banks know very well that only a few of their thirty years loans will ever go the length”

      That’s actually the point. According to the US census, the average American moves every 5-7 years. In doing so, they close out home loans quite often. Which again is why GNMA’s have such short duration portfolios and are less interest rate sensitive. Because a large percentage of loans are never held to maturity. So how then does a bank stay in business if they can’t constantly extend credit.

      bmOC

      The point is why should the banks be allowed to make a windfall profit at the expense of the borrower.

      I don't care so much about the due on sale, I care about the additional profit made by the bank above the contracted amount.

      ----------

      You wrote

      If I can just assume your note, than the bank is cut out of the loop and that same note can be passed to 10 different people. Sounds nice until we realize that banks are accountable for creating about 90% of the M2 money supply. So without them…we’re in trouble.

      bmOC

      The banks were bailed out by the US government, taxpayer money, and yet the banks didn't even loan to other banks in the beginning. They did however give themselves seven figure bonuses. So for bankrupting their bank they get a bonus from the taxpayers?

      -------

      You wrote

      There is nothing more dangerous than a banking system that is about to collapse. Sucking profits from the banking system collapses the money supply.

      bmOC

      We are talking only about windfall profits, the ones they would never get if the loan went the full term. The borrowers would have the supply of money that they saved from the overreaching of the banks.

      It is the banks that caused the 2008 economic problem, and the borrowers were the ones, along with the taxpayers that had to pay for them. The FRB invested hundreds of billions of dollars when the economy didn't respond to the TARP and other government bailouts. They invested it into the same product that triggered the collapse, the real estate loan derivatives.

      Banks should make a fair profit, no more and no less. But the due on sale clause gives them unfair profits, and profits that were not negotiated in the loan contracts, nor even mentioned in the APR, or any documents.

      A contract that can't be negotiated is not a valid contract.

      -------------

      You wrote

      “Even with the recalculations that I suggested the banks will still have made a fair profit for their investment”

      You can’t possibly know what their profit margin is unless you know what their operating expenses are. Just the new Dodd-Frank compliance alone is an enormous expense. Profit and loss is not dictated exclusively based on one variable. You can certainly rest assured that if you came to me to borrow money, and I had to factor in the risk that the liability was transferrable to a theoretically endless number of people…there would be significantly higher added cost to cover that liability.

      bmOC

      The banks make their money on the money that they loan from the government, and it is the government that sets their rate. And that is why the variable interest loans were invented so that the banks can renegotiate on the new rate.

      You keep forgetting that the system before the due on sale clause worked.

      The due on sale was created for the benefit of the banks, as was the sub prime bubble.

      ---------------

      You wrote

      You’ll pay for it somewhere. There are no free lunches. If you loaned your friend your car, and he then lent it to someone else, who then lent it to someone else…would you be ok with that ???

      bmOC

      You keep losing the point of my argument. The due on sale clause produces un-negotiated profits at the expense of the borrower. It doesn't diminish the profit that the bank would receive from the full term of the loan.

      It is the banks that are getting the freebies, not the borrower.

      The Glass Stegal is more powerful than the Frank Dodd, and that was the standard until is was repealed. And that repeal resulted in the economic collapse of 2008.

      FHA loans

      When homeowners sell or refinance a home, they are paying off the original loan early. Many sub-prime loans require the borrower to pay a penalty for prepayment. While this requirement is included in the contract, home loan paperwork is often lengthy and requires strict attention to the entire document. It's very easy for a first-time home buyer to feel overwhelmed by the documentation and miss important details including a prepayment penalty.

      State laws often require your loan officer to provide you with advance notice of such penalties before you sign, but for those seeking FHA loans, such prepayment penalties are not allowed. FHA home loans may not contain prepayment penalties or a due on sale clause--except in specific circumstances where a due on sale clause is allowed when it's connected with the use of tax-exempt bond financing. A due-on-sale clause usually dictates you pay your loan off in full when you sell the home rather than signing a loan over to the new owners.

      FHA mortgage rules governing pre-payment penalties protect the borrower from unnecessary fees, hidden expenses, and financial hardship. When a borrower comes to the FHA in good faith, FHA loan rules insure a fair deal for both the bank and the home owner. FHA regulations do prohibit a fee for prepayment of an FHA home loan, but you may be required to pay a sum if you pre-pay an FHA loan on any date past the first day of the month. In these cases you may have to pay interest until the end of the month. Whether or not you pay that interest is left to the lender's discretion and this practice is allowed under FHA rules. If you want to refinance or sell your home, make sure you pre-pay the FHA loan on the first of the month to avoid paying additional interest fees.

      -------------------

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      You wrote

      More simply put...a mortgage or any form of credit extension is a contract between two parties. I am not to keen on the idea that a borrower, who represents the liability in the equation can simply transfer that liability which represents an asset to another party (in this case the bank) to another 3rd party. If someone doesn't like the provisions of the loan agreement they can simply not borrow the money. I certainly wouldn't want a third party selling my assets for me unless I specifically appointed them to do so.

      bmOC

      These loans are take it or leave it which precludes a bargaining element of contracts. You can't go somewhere else because they all use the clause.

      It seems like the prepayment penalty is at odds with your opinion. The banks claim that they are losing money because you didn't see the loan full term, how ridiculous is that when they made more profit than they should have for the actual term of the loan.

      .......

      Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations even though ownership has changed. If there is a divorce or legal separation and ownership between spouses changes (for example, the property was jointly owned and becomes owned by a single spouse), the lender cannot enforce the due-on-sale clause. The same is true if the owner transfers the property to his or her children, if a borrower dies and the property is transferred to a relative, or if the property is transferred to a living trust and the borrower is the trust’s beneficiary.

      ----------------

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      “How about the Uniform Commercial Code holding it unenforceable”

      I am not saying it’s not enforceable…I questioning whether or not it’s a good idea.

      “This scenario worked and existed prior to the due on sale clause creation. And it shouldn't make any difference to the bank as they were committed to a 30 year period.”

      It certainly makes a difference. When a bank underwrites a loan, it’s an extensive process that involves qualifying a buyer, validating title’s etc. If banks can have their asset’s transferred and have the right to qualify the new holder of the note, who is paying for all of this. The bank’s is essentially being asked to complete the closing process all over again. This all costs money and time. And the reason these clauses were inserted into loan contracts is because it wasn’t working. When rates were rising dramatically in the 1970’s, homeowners were doing exactly what I was saying. They were circumventing the banking system to avoid the higher rates. If that were permitted to continue it would have crushed the banking system. They would have to borrow from the Fed at significantly higher rates than their portfolio of loans being serviced.

      The Fed was certainly too late to raise rates during the housing bubble. But monetary policy works in multiple ways. Raising short term rates is only one mechanism, and it is not designed to manage the housing market. Changes to monetary policy are enacted through open market operations as well. The housing market is only one component of economic data that the Fed evaluates. By definition, monetary policy must be reactive. And because the Fed must consume enormous amounts of data, they will always be late to respond to economic changes. That does not change the fact that we still need a monetary policy that can affect changes. Fannie/Freddie had nothing to do with the central bank. They are an entirely different entity that serves no valuable purpose in my view.

      “The point is why should the banks be allowed to make a windfall profit at the expense of the borrower”

      They should be allowed to make whatever they have legally contracted to make. Anyone who takes a home loan, knows they are paying almost exclusively interest in the early years of a typical 30 year mortgage. It’s itemized on your tax statement and your monthly mortgage invoice. If they don’t there foolish for signing off on something without knowing what they are signing. The other issue is you need to consider the banks liability. If the borrower can’t pay the payments shortly after the loan is issued…the bank is on the hook. They can foreclose…but that is an unprofitable venture. Collecting their profit up front is the price you pay for asking them to extend you the credit they created. If the loan was recalculated as you suggest, does the homeowner then have to file amended tax return for the years they took interest deductions that are no longer regarded as interest payments ???

      “The banks were bailed out by the US government, taxpayer money, and yet the banks didn't even loan to other banks in the beginning. They did however give themselves seven figure bonuses. So for bankrupting their bank they get a bonus from the taxpayers? “

      Most banks were not bailed out, and didn’t need or want the TARP money. It was forced on them by the Fed. And when they tried to pay it back after they realized they were charged additional interest on TARP…the gov’t wouldn’t let them pay it back. There were many irresponsible lending practices. But the majority of it was either directly mandated by Federal gov’t or directly influenced by the GSE’s intervening in the marketplace. When banks evaluate credit quality on their own without gov’t influence distorting the market…they do a very good job of it. Unfortunately, even today it is still irrelevant. All lending standards are still set by the Federal Gov’t. That’s why when you apply for a loan…the amount of lending available varies only nominally from bank to bank. Because they don’t set the standards on their own.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      “We are talking only about windfall profits, the ones they would never get if the loan went the full term. The borrowers would have the supply of money that they saved from the overreaching of the banks.”

      Define windfall profits…How much is a windfall. If the loan goes 30 years, the bank does not make less money that if you paid the loan off from the sale of a home in 5 years. It’s exactly the opposite. A bank collects more in interest payments if the loan goes full duration. If you sell a home…you don’t pay the bank the future interest that you would have paid or any other interest for that matter. You pay off remaining principal only. So the bank is making less money not more. And if rates are filing they may be extending credit at tighter margins and making less on the replacement loan. I think you’re missing something here. When a bank loans you money…they are not taking it from someone else. They quite literally invent the money out of thin air. Every time a principal payment is made, it literally extinguishes a dollar from existence. So when you pay off a loan…the money related to principal payments literally vanishes from the money supply. Now all of this lending is based on a multiple of the monetary base. So when you pay off a loan…it frees up lending capacity for a different loan to be created. But the bank is not making more money from the closing out of a loan unless a new loan is issued in its place at a more favorable spread. I personally am 6 years into my current mortgage. I have paid nowhere near the amount of interest that I will have paid at the end of the full 30 years. If I paid off the entire loan today because I sold my home or had the liquid cash…I pay principal only and would have paid significantly less in aggregate interest to the bank. So I am not sure what you mean by windfall. The last thing a bank wants you to do is pay off a loan unless it is being replaced by another loan. Due on sale mean only that you satisfy the remaining principal owed.

      “It is the banks that caused the 2008 economic problem, and the borrowers were the ones, along with the taxpayers that had to pay for them. The FRB invested hundreds of billions of dollars when the economy didn't respond to the TARP and other government bailouts.”

      It was the Federal gov’t intervening in the banking system that caused the housing bubble. But that is another story altogether. The FRB doesn’t invest billions of dollars. Quantitative Easing was just a dramatic expansion into an already existing tool of open market operations. This had been Fed policy until very recently and was designed to increase the monetary base and expand credit capacity. The monetary base once created doesn’t go anywhere. It is never lost. It just remains as excess reserves. Although I would argue that they recognized there was, and is still a total breakdown between the fractional reserve lending system and the monetary base years ago. And QE really evolved into managing the budget deficit by suppressing the longer end of the yield curve.

      “The banks make their money on the money that they loan from the government, and it is the government that sets their rate”

      Wrong…banks do not lend dollars that they borrow from the gov’t. Banks invent credit dollars of their own. Their allowable credit creation is a multiple of reserves. Those reserves come from various sources. One of those sources is gov’t deficits. The gov’t spends X and collects Y in tax revenue. When the tax revenue is not enough to cover the spending…we have a budget deficit. Those additional dollars spent into the economy are added into the monetary base and become part of bank reserves somewhere in the aggregate banking system. The larger the reserves…the more credit creation available. Reserves also increase as a result of things like the current QE program. The banks do borrow from the Fed when additional reserves are needed. (Today we have an enormous amount of excess reserves in the aggregate banking system). But reserve dollars borrowed from the Fed never get lent to the public. They stay on deposit with the Fed.

      Also the Fed only sets the short term rates. This has little impact on bank lending in relation to mortgages. It has more of an effect on savings and money market rates. Mortgage rates are dictated by the longer end of the yield curve. The Fed cannot set long or intermediate term rates. They can however attempt to influence them indirectly via open market operations.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      “You keep forgetting that the system before the due on sale clause worked.

      The due on sale was created for the benefit of the banks, as was the sub prime bubble”

      Due on sale was created as I explained earlier in the 70’s to prevent interest rate arbitrage by the general public. And subprime was created for the GSE’s…not the banking system. It was the banking exec’s that warned about the subprime market back when they first started the CRA act.

      “You keep losing the point of my argument. The due on sale clause produces un-negotiated profits at the expense of the borrower. It doesn't diminish the profit that the bank would receive from the full term of the loan”

      It is not un-negotiated. All you have to do is look at the amortization table of the loan at issuance. The interest paid stops at the point of the loan being called due. If you sold the home a year after you bought it…you paid only the first year’s interest payments, which was clearly outlined in the table. You’re not obligated to pat the next 29 years. You pay principal only. Penalties for prepayment are almost non-existent anymore. And typically they are not more than a year.

      “The Glass Stegal is more powerful than the Frank Dodd, and that was the standard until is was repealed. And that repeal resulted in the economic collapse of 2008.”

      Glass Steagal was not the culprit. Glass Steagal was repealed because it hadn’t been enforceable since the 1950’s. Banks and investment banks were already operating together under holding companies long before it was repealed. The irony of that argument is that the financial institutions that best weathered 2008 and were called in to help the Federal gov’t were the ones with the diversified business models of both commercial and investment banking. And the one’s that more closely followed the old Glass Stegal provisions were the ones that were in the most trouble because their revenue stream were one dimensional.

      “These loans are take it or leave it which precludes a bargaining element of contracts. You can't go somewhere else because they all use the clause”

      The fact that one component of a contract is non-negotiable as per one party does not void the legality of a contract. There are numerous things associated with a mortgage issuance that are negotiable. You can negotiate points, closing costs etc. It most certainly meets the legal standard of a contract. If you choose to enter into it…it’s a contract.

      “It seems like the prepayment penalty is at odds with your opinion.”

      Except virtually no home loan is issued with a prepayment penalty anymore outside of ultra short durations. I just aided a client in bridge loan to temporarily carry two properties because they couldn’t sell their residence before buying the new property. They plan to pay the loan off as soon as the original property sells. Wells Fargo asked for prepayment penalties only if the loan is paid off in less than 3 months. That is hardly unreasonable. And the penalty is only $1,000 on a $330k loan. After that you pay principal only. It sounds like you have a complaint about a problem that doesn’t exist anymore and hasn’t for decades.

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      you wrote

      “This scenario worked and existed prior to the due on sale clause creation. And it shouldn't make any difference to the bank as they were committed to a 30 year period.”

      It certainly makes a difference. When a bank underwrites a loan, it’s an extensive process that involves qualifying a buyer, validating title’s etc. If banks can have their asset’s transferred and have the right to qualify the new holder of the note, who is paying for all of this. The bank’s is essentially being asked to complete the closing process all over again. This all costs money and time. And the reason these clauses were inserted into loan contracts is because it wasn’t working. When rates were rising dramatically in the 1970’s, homeowners were doing exactly what I was saying. They were circumventing the banking system to avoid the higher rates. If that were permitted to continue it would have crushed the banking system. They would have to borrow from the Fed at significantly higher rates than their portfolio of loans being serviced.

      bmOC

      First it was the 80s not the 70s, and second that original loan was borrowed at the low rate by the bank, and not the newer higher rate. Had the loan gone full term the bank wouldn't see anything different than if a new borrower took over that loan.

      Where were all of these safeguards in 2008, when the banks did actually collapse, and the Taxpayers had to pay for their greed and incompetence?

      -------------------

      you wrote

      The Fed was certainly too late to raise rates during the housing bubble. But monetary policy works in multiple ways. Raising short term rates is only one mechanism, and it is not designed to manage the housing market. Changes to monetary policy are enacted through open market operations as well. The housing market is only one component of economic data that the Fed evaluates. By definition, monetary policy must be reactive. And because the Fed must consume enormous amounts of data, they will always be late to respond to economic changes

      bmOC

      The FRB knew what they were doing, and that was feeding the bubble. They were not too late, they were on their plan. They knew that if they raised the rates even a little, the loans would crash.

      -------------------------------

      you wrote

      . That does not change the fact that we still need a monetary policy that can affect changes. Fannie/Freddie had nothing to do with the central bank. They are an entirely different entity that serves no valuable purpose in my view.

      bmOV

      They were the agencies that perpetrated the fraud of the sub prime bubble. They put aside all the safeguards, and generated loans that they knew would fail, but they hoped that it wouldn't fail before the presidential election.

      They had everything to do with the economic collapse.

      -----------------------

      you wrote

      “The point is why should the banks be allowed to make a windfall profit at the expense of the borrower”

      They should be allowed to make whatever they have legally contracted to make. Anyone who takes a home loan, knows they are paying almost exclusively interest in the early years of a typical 30 year mortgage. It’s itemized on your tax statement and your monthly mortgage invoice. If they don’t there foolish for signing off on something without knowing what they are signing.

      bmOC

      These windfall profits were not contracted for as designated by the APR. And you as an expert should know that.

      ----------------------

      you wrote

      The other issue is you need to consider the banks liability. If the borrower can’t pay the payments shortly after the loan is issued…the bank is on the hook. They can foreclose…but that is an unprofitable venture. Collecting their profit up front is the price you pay for asking them to extend you the credit they created. If the loan was recalculated as you suggest, does the homeowner then have to file amended tax return for the years they took interest deductions that are no longer regarded as interest payments ???

      bmOC

      Both the bank and the homeowner have to file amended returns, something that banks only do to hide their profits.

      The amortized loan doesn't get profits up front, it merely uses the declining time to assess the principal versus the interest, but when the term is cut short that math is no longer valid.

      The way that the banks protected themselves for to require a substantial down payment that would give the property enough equity to weather a default by the borrower. Something that they didn't do during the bubble.

      The conventional loans would also have the borrower pay about a half point for mortgage insurance when the loan didn't have enough equity.

      As for closing costs to the new borrower, I don't think that would be a problem. A new buyer would want Title Insurance to ensure that the property had no legal problems.

      ---------------------------

      you wrote

      “The banks were bailed out by the US government, taxpayer money, and yet the banks didn't even loan to other banks in the beginning. They did however give themselves seven figure bonuses. So for bankrupting their bank they get a bonus from the taxpayers? “

      Most banks were not bailed out, and didn’t need or want the TARP money. It was forced on them by the Fed. And when they tried to pay it back after they realized they were charged additional interest on TARP…the gov’t wouldn’t let them pay it back. There were many irresponsible lending practices. But the majority of it was either directly mandated by Federal gov’t or directly influenced by the GSE’s intervening in the marketplace.

      bmOC

      The biggest banks were bailed out, and any forcing by the government was too prevent the domino effect. There was a good documentary on how the government decided to bail out, and which financial institutional would have to acquire the unstable debt ridden ones.

      ---------------------------

      you wrote

      When banks evaluate credit quality on their own without gov’t influence distorting the market…they do a very good job of it. Unfortunately, even today it is still irrelevant. All lending standards are still set by the Federal Gov’t. That’s why when you apply for a loan…the amount of lending available varies only nominally from bank to bank. Because they don’t set the standards on their own.

      bmOC

      Neither the banks nor the government did an even adequate job, and that is why we had the economic collapse. The republicans caused the Glass Stegall act to be repealed allowing the financial institutions to go into new areas without any safeguards.

      The 2008 economic collapse is a Fact that disputes all your theories on how banks and financial institutions work. Your whole concept of how the system works, failed as a fact in 2008. It was not an overnight collapse, and yet the government did nothing to protect the people or the taxpayers. How does a financial institution that was bankrupt, not only get bailed out, but the executives that caused the failure, actually give themselves seven digit bonuses with taxpayer money?

      -----------------------

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      you wrote

      “We are talking only about windfall profits, the ones they would never get if the loan went the full term. The borrowers would have the supply of money that they saved from the overreaching of the banks.”

      Define windfall profits…How much is a windfall. If the loan goes 30 years, the bank does not make less money that if you paid the loan off from the sale of a home in 5 years. It’s exactly the opposite. A bank collects more in interest payments if the loan goes full duration. If you sell a home…you don’t pay the bank the future interest that you would have paid or any other interest for that matter. You pay off remaining principal only. So the bank is making less money not more.

      bmOC

      Seriously, do the math.

      Also, your current argument is opposite to your reason why the bank can't afford to let a new borrower assume the existing loan. They would get the same interest payments total with the new borrower, adding to what they received from the original borrower.

      With the shorten term of the loan, the interest is not commensurate with the risk and the commitment of the full term. So in dollars they received less interest totals, but they are free from holding their money in the original loan.

      So windfall is anything about the contracted APR which was based only on the thirty year loan. If we take the principal of the 5 year shortened thirty year loan, and calculated using the same interest rate, how much interest would than loan draw compared to the five year mark on the thirty year loan. The difference is windfall profit. Profit not contracted by the parties in their original documents.

      ---------------

      you wrote

      And if rates are filing they may be extending credit at tighter margins and making less on the replacement loan. I think you’re missing something here. When a bank loans you money…they are not taking it from someone else. They quite literally invent the money out of thin air. Every time a principal payment is made, it literally extinguishes a dollar from existence. So when you pay off a loan…the money related to principal payments literally vanishes from the money supply. Now all of this lending is based on a multiple of the monetary base. So when you pay off a loan…it frees up lending capacity for a different loan to be created. But the bank is not making more money from the closing out of a loan unless a new loan is issued in its place at a more favorable spread. I personally am 6 years into my current mortgage. I have paid nowhere near the amount of interest that I will have paid at the end of the full 30 years. If I paid off the entire loan today because I sold my home or had the liquid cash…I pay principal only and would have paid significantly less in aggregate interest to the bank. So I am not sure what you mean by windfall. The last thing a bank wants you to do is pay off a loan unless it is being replaced by another loan. Due on sale mean only that you satisfy the remaining principal owed.

      bmOC

      These arguments don't make any sense, and they are not fact.

      The bank has paid the seller of the property with money that they loaned at prime or less rate. That money is a now a bank debt, it is protected by the FDIC and any loan insurance like the FHA.

      When the loan is paid early, once again to get the agreed upon interest, the bank needs to wait thirty years. When the loan is shortened, the amount of the total interest paid is less than the total for the thirty years, but it is more interest than if they have a five year loan for example. The fact that the loan didn't complete the full term should be deemed as a modification of the loan. The new borrower picks up the loan schedule where the original borrower left off. The new borrower would pay whatever it requires to qualify for the bank as a new borrower.

      For the first ten years of a thirty year loan, it is imperceptible from an interest only loan. The principal paid is chump change.

      As for tax deductions for interest paid on the loan, not all taxpayers make a salary that would use the full extent of the deduction. Especially those people that had to sell because of financial hardship.

      --------------------------

      you wrote

      “It is the banks that caused the 2008 economic problem, and the borrowers were the ones, along with the taxpayers that had to pay for them. The FRB invested hundreds of billions of dollars when the economy didn't respond to the TARP and other government bailouts.”

      It was the Federal gov’t intervening in the banking system that caused the housing bubble. But that is another story altogether. The FRB doesn’t invest billions of dollars. Quantitative Easing was just a dramatic expansion into an already existing tool of open market operations. This had been Fed policy until very recently and was designed to increase the monetary base and expand credit capacity. The monetary base once created doesn’t go anywhere. It is never lost. It just remains as excess reserves. Although I would argue that they recognized there was, and is still a total breakdown between the fractional reserve lending system and the monetary base years ago. And QE really evolved into managing the budget deficit by suppressing the longer end of the yield curve.

      bmOC

      I really can't agree with any of that because the nature of the failure was like a railroad engine with no safeguards to stop it from failing, and crashing.

      The FRB was trying to hide the fact that the bundled derivatives were fraudulent, and if they didn't continue to float them after the original hundreds of billions thrown at it, they said the because the economy was not responding they would invest 40 billion dollars a months, until the economy recovered enough for them to stop.

      -----------------------------

      you wrote

      “The banks make their money on the money that they loan from the government, and it is the government that sets their rate”

      Wrong…banks do not lend dollars that they borrow from the gov’t. Banks invent credit dollars of their own. Their allowable credit creation is a multiple of reserves. Those reserves come from various sources. One of those sources is gov’t deficits. The gov’t spends X and collects Y in tax revenue. When the tax revenue is not enough to cover the spending…we have a budget deficit. Those additional dollars spent into the economy are added into the monetary base and become part of bank reserves somewhere in the aggregate banking system. The larger the reserves…the more credit creation available. Reserves also increase as a result of things like the current QE program. The banks do borrow from the Fed when additional reserves are needed. (Today we have an enormous amount of excess reserves in the aggregate banking system). But reserve dollars borrowed from the Fed never get lent to the public. They stay on deposit with the Fed.

      bmOC

      The bottom line is without the money from the government, the banks have no real working capital. Their product is growing money, money that starts with government loaning it to them at a good for the time rate.

      --------

      you wrote

      Also the Fed only sets the short term rates. This has little impact on bank lending in relation to mortgages. It has more of an effect on savings and money market rates. Mortgage rates are dictated by the longer end of the yield curve. The Fed cannot set long or intermediate term rates. They can however attempt to influence them indirectly via open market operations.

      bmOC

      Once again, the bottom is the money is coming from the government, and the FDIC protects the banks from taking more risk. It is the short term interest that the banks must extrapolate to make their profit on mortgages.

      You can't possibly be saying that the system works because 2008 is proof that it didn't work. It is still not working. The only thing helping the economy today is the tremendous drop in oil prices.

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      you wrote

      “You keep forgetting that the system before the due on sale clause worked.

      The due on sale was created for the benefit of the banks, as was the sub prime bubble”

      Due on sale was created as I explained earlier in the 70’s to prevent interest rate arbitrage by the general public. And subprime was created for the GSE’s…not the banking system. It was the banking exec’s that warned about the subprime market back when they first started the CRA act.

      bmOC

      That is why every bank had aggressive marketing programs to use that subprime money. I couldn't go into a bank without them trying to tell me about their mortgages, and refinance programs. It was also not known to the public the consequences of an equity loan versus the mortgage. The difference in the bank forgiveness on them is different. The IRS looks at the forgiveness of an equity loan as income to be taxed.

      --------------------

      you wrote

      “You keep losing the point of my argument. The due on sale clause produces un-negotiated profits at the expense of the borrower. It doesn't diminish the profit that the bank would receive from the full term of the loan”

      It is not un-negotiated. All you have to do is look at the amortization table of the loan at issuance. The interest paid stops at the point of the loan being called due. If you sold the home a year after you bought it…you paid only the first year’s interest payments, which was clearly outlined in the table. You’re not obligated to pat the next 29 years. You pay principal only. Penalties for prepayment are almost non-existent anymore. And typically they are not more than a year.

      bmOC

      The table is meant to schedule the entire period not anything less than that time. So that is a different loan than a 30 year amortized loan. The interest is mostly paid to the bank in the first fifteen years. So how could a shortened loan period be accurately compared using a 30 year schedule?

      ------------------

      “The Glass Stegal is more powerful than the Frank Dodd, and that was the standard until is was repealed. And that repeal resulted in the economic collapse of 2008.”

      Glass Steagal was not the culprit. Glass Steagal was repealed because it hadn’t been enforceable since the 1950’s. Banks and investment banks were already operating together under holding companies long before it was repealed. The irony of that argument is that the financial institutions that best weathered 2008 and were called in to help the Federal gov’t were the ones with the diversified business models of both commercial and investment banking. And the one’s that more closely followed the old Glass Stegal provisions were the ones that were in the most trouble because their revenue stream were one dimensional.

      bmOC

      And that one dimensional prevented the creation of devices that were not fundamentally stable. Like the dot com, allowed traditional analysis of stocks to become catch the train before it leaves the station. This violated the prudent rules of the stock market, letting startup companies trade as if they even had a product, much less the ability to produce a product, or to make a profit on a product. Yet, these bubble stocks were treated like the solid base of stocks that had all of these attributes. That was not prudent, and neither were all of the newly created financial devices, that wouldn't have been legal before the repeal of GSA.

      ---------------------------

      You wrote

      “These loans are take it or leave it which precludes a bargaining element of contracts. You can't go somewhere else because they all use the clause”

      The fact that one component of a contract is non-negotiable as per one party does not void the legality of a contract. There are numerous things associated with a mortgage issuance that are negotiable. You can negotiate points, closing costs etc. It most certainly meets the legal standard of a contract. If you choose to enter into it…it’s a contract.

      bmOC

      Your statement has no fact or credibility.

      If the part of the contract that is important to a party cannot be negotiated then it is not a valid contract per se. It can become severable from the total contract, meaning that other parts of the contract that are not contested remain in effect.

      ------------------

      you wrote

      “It seems like the prepayment penalty is at odds with your opinion.”

      Except virtually no home loan is issued with a prepayment penalty anymore outside of ultra short durations. I just aided a client in bridge loan to temporarily carry two properties because they couldn’t sell their residence before buying the new property. They plan to pay the loan off as soon as the original property sells. Wells Fargo asked for prepayment penalties only if the loan is paid off in less than 3 months. That is hardly unreasonable. And the penalty is only $1,000 on a $330k loan. After that you pay principal only. It sounds like you have a complaint about a problem that doesn’t exist anymore and hasn’t for decades.

      bmOC

      My point was that it contracted your opinion on the need for the bank to make that penalty to exist.

      And like the due on sale clause, the prepayment penalty was thought to be OK.

      --------------

      LMW

      Here is the issue

      The due on sale clause makes the 30 year fully amortized loan look like an interest only loan with a ballon payment.

      A new borrower after fifteen years would realize little income to the bank, and conversely a new borrower before the fifteen years would realize more profit for the bank at the expense of the original borrower.

      So it seems that you favor the institution over the person.

      That is the basis of my issue. What is the basis of your issue?

      Thanks

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      “First it was the 80s not the 70s, and second that original loan was borrowed at the low rate by the bank, and not the newer higher rate”

      Rates began to rise aggressively in the 70’s and this behavior of circumventing banks began. The prime peaked in about May of 1981 at 21.5%. So because of the behavior in the late 70’s banks began inserting these clauses in the 80’s. If a loan was issued at a hypothetical rate of 7% in 1972 and the seller wished to sell in 1980…the bank is stuck servicing a loan in their book that is not consistent with the current rate environment. The overnight lending rate in 1981 was higher that a 30 year mortgage issued in the mid 70’s. So if the note is transferred regularly…the banks have a guaranteed loss when you look at a snapshot of their overhead at the time. If you borrow overnight for more than you collect on 30 year paper…you won’t stay in business long.

      “Where were all of these safeguards in 2008, when the banks did actually collapse, and the Taxpayers had to pay for their greed and incompetence”

      The taxpayers made money on TARP after interest payments. The only losses came from the automakers. And the safeguards were circumvented by the GSE’s. But GSE’s are not the banking system. If the CRA requires you to make low quality loans…then you will. You’re required to. At the time of the collapse in 2008 more than 70% of below investment grade loans were held on the books of a gov’t agency…not the banking system.

      “The FRB knew what they were doing, and that was feeding the bubble. They were not too late, they were on their plan”

      That is quite an accusation. Is there some evidence to back that up ??? Considering that it is the nature of central banks to react slowly to developing economic data, it is fair to call them inefficient. But the conspiracy theories don’t hold much water.

      “They were the agencies that perpetrated the fraud of the sub prime bubble. They put aside all the safeguards, and generated loans that they knew would fail, but they hoped that it wouldn't fail before the presidential election”

      Fannie and Freddie were extremely corrupt…no question about it. And I personally see no reason to have a gov’t agency hybrid that directs the flow of capital. All this does is misallocate capital. But that has nothing to do with the Central Bank. These are two distinctly different bodies that are not remotely connected.

      “These windfall profits were not contracted for as designated by the APR. And you as an expert should know that”

      Go back and re-read your mortgage terms again…the terms are clearly outlined.

      “Both the bank and the homeowner have to file amended returns, something that banks only do to hide their profits”

      Neither one have to file an amend return because your scenario doesn’t exist…and if it did you’d create a tax nightmare.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      “The amortized loan doesn't get profits up front, it merely uses the declining time to assess the principal versus the interest, but when the term is cut short that math is no longer valid”

      That is the definition of getting profit up front. The amortization schedule outlines the interest due annually. The interest load is heavier on the front end to cover the bank’s profits for expenses laid out at loan origination. If banks were forced to do what you suggest, the profit margin would be crushed and the cost would simply be incurred elsewhere. Either in higher up front closing costs…higher lending rates or some other banking fee. Banks have always front loaded interest payments in the amortization schedule regardless of whether or not there was a 20% down payment or less than that with PMI included. You could put 80% down and the amortization will still see early payments comprised mostly of interest. Titles searches are only one component of closing costs. Banks have entire departments devoted to loan underwriting and origination. Those departments have staff with salaries, benefits and liabilities. If they can’t lock in an adequate profit margin…then they simply won’t make the loan. The current structure of a loan simply secures the bank’s profits in advance. If you don’t like it…then buy the place cash.

      “The biggest banks were bailed out, and any forcing by the government was too prevent the domino effect”

      That is completely false. The biggest banks like JP Morgan were the ones who were asked by the Federal Gov’t to do the bailing out of smaller entities like Bear Stearns. And JP Morgan was a classic example of a bank with a diversified revenue stream that made them more sustainable in a volatile environment. Which is the exact thing Glass Steagall was set up to prevent. The forced capital was to prevent a run on the banking system by a public that has little understanding of how the monetary system works. If panic ensued then the M2 supply would be decimated. But very few banks needed the capital because they were very well capitalized.

      “Neither the banks nor the government did an even adequate job, and that is why we had the economic collapse. The republicans caused the Glass Stegall act to be repealed allowing the financial institutions to go into new areas without any safeguards”

      Banks were forced to make loans that they would not have otherwise have made because of CRA standards. Ask a CRA auditor at a bank what happens when you don’t comply. Banks DO NOT set lending standards. That is done by the Gov’t. This was not optional. Glass Steagall has nothing to do with it. If that were the cause than the collapse should have happened in the 1950’s, 60’s, 70’s etc. Because Glass Steagall was totally unenforceable. If you walked into a bank in 1975 and they had someone there that could sell you investments, which every bank did…how could that be if Glass Steagall was not yet repealed ??? Because it was 100% cosmetic.

      “The 2008 economic collapse is a Fact that disputes all your theories on how banks and financial institutions work. Your whole concept of how the system works, failed as a fact in 2008. It was not an overnight collapse, and yet the government did nothing to protect the people or the taxpayers.”

      What theories are those ??? My only theory is one that played out exactly as I would have expected. When the gov’t intervenes in the marketplace to influence demand and socially engineer an outcome…you get market dislocations. That is precisely what took place in the housing market sector. The GSE’s produced artificial loan demand which could not exist independently. The GSE’s are run by the US congress…not the banking system. Banks, like any other business respond to demand. Except in this case they had not only artificial demand…but also Federal mandates to write low quality paper.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      “Also, your current argument is opposite to your reason why the bank can't afford to let a new borrower assume the existing loan. They would get the same interest payments total with the new borrower, adding to what they received from the original borrower”

      No…you do the math. Try managing a fixed income portfolio with your own money when you have no ability adjust to a changing interest rate environment and let me know how you do. Banks have a changing cost structure which is invariably heavily linked to interest rates. If every loan from the early to mid 70’s was simply transferred to another home buyer, while at the same time the banks have an overnight lending rate that has increased to about 15%...how long before you borrow at 15% and collect on loans for half that amount will it take before you go out of business.

      “With the shorten term of the loan, the interest is not commensurate with the risk and the commitment of the full term. So in dollars they received less interest totals, but they are free from holding their money in the original loan”

      All of the risk is in the earlier duration of the loan. That’s when the risk of a property falling “underwater” is, not 20 years later. That’s when all of their cost are incurred, not servicing the loan for the next 30 years. And their money is not free from holding it in a loan…it is extinguished. Every time a loan is made…a new dollar of credit is created. Every time you make a principal payment…that dollar vanished from existence. Loans create deposits…not the other way around.

      “The bank has paid the seller of the property with money that they loaned at prime or less rate. That money is a now a bank debt, it is protected by the FDIC and any loan insurance like the FHA.”

      No they don’t. Bank reserves CANNOT be lent out to the public…It is not even legal. Maybe this will help you. Read the PDF by Standard & Poors

      http://www.positivemoney.org/2013/08/repeat-after-...

      “The FRB was trying to hide the fact that the bundled derivatives were fraudulent, and if they didn't continue to float them after the original hundreds of billions thrown at it, they said the because the economy was not responding they would invest 40 billion dollars a months, until the economy recovered enough for them to stop”

      Bundled derivatives are not fraudulent. Every derivative written has a counterparty to the transaction. There is nothing fraudulent about them. In fact many of them remain excellent investment opportunities today. People throw these words around without even understanding what a derivative is. The Fed’s bond buying program had NOTHING to do with the derivative markets. It was to increase lending capacity by expanding the monetary base in the face of potential deflation. And later I believe it was to suppress the long end of the curve. That’s why QE tapering was pinned to the annual deficit projections.

      “The bottom line is without the money from the government, the banks have no real working capital. Their product is growing money, money that starts with government loaning it to them at a good for the time rate”

      All currency that any of us holds has to originate with gov’t in the monetary base…because there is only one monetary authority. I fail to see how that is relevant. Most of bank reserves does not come from gov’t lending…it comes from deficit spending.

      “Once again, the bottom is the money is coming from the government, and the FDIC protects the banks from taking more risk. It is the short term interest that the banks must extrapolate to make their profit on mortgages”

      Short term rates DO NOT dictate lending rates for mortgages. Short term rates like the Fed Funds rate dictate overnight lending rates. If the Fed raised short term rates to 4% tomorrow, but we had a flat yield curve…which is entirely possible considering how much money is now on the short end of the curve…mortgage rates don’t have to go up at all. The FDIC actually encourages banks to take more risk. You have that one totally backwards.

      The banking system works fine when it’s permitted to work independently of social engineering. Unfortunately, that has not been the case for some time. The Federal Gov’t dictates all the terms. Who must get loans…how much and the parameters of what they can get lent…etc. That has been the case for decades now. And that will not change any time soon because there are too many politicians who like to intervene in the laws of supply and demand.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      “That is why every bank had aggressive marketing programs to use that subprime money”

      “It was also not known to the public the consequences of an equity loan versus the mortgage.”

      CRA mandates a certain % of loans must be subprime by mandating zip code lending. It does not originate with the banks…it originates with the Gov’t. As far as some people not knowing the difference between HELOC’s and a conventional mortgage…well…some people don’t the difference between a stock and bond either…Some people are idiots also. What does that have to do with anything.

      “The table is meant to schedule the entire period not anything less than that time. So that is a different loan than a 30 year amortized loan. The interest is mostly paid to the bank in the first fifteen years. So how could a shortened loan period be accurately compared using a 30 year schedule”

      I already explained this and it’s getting redundant. The bank takes the risk…and they don’t know for sure which loan will go to term and which won’t. So they secure their profit up front. The risk is on the front end…not a couple of years before the loan is paid off. If you paid the loan off earlier, that did not change their cost structure at loan origination. They already incurred those expenses.

      “And that one dimensional prevented the creation of devices that were not fundamentally stable. Like the dot com, allowed traditional analysis of stocks to become catch the train before it leaves the station.”

      “That was not prudent, and neither were all of the newly created financial devices, that wouldn't have been legal before the repeal of GSA.”

      Seriously…where do you get this stuff ??? Glass Steagall had NOTHING to do with stock market analysis of individual securities. The tech bubble began before the act was even repealed. And if you’re talking about the CMO market…there is nothing imprudent about their creation as an investment vehicle. I use them all the time. It was the excess supply created by artificial GSE demand that was an issue. Once again…nothing to do with Glass Steagall.

      “If the part of the contract that is important to a party cannot be negotiated then it is not a valid contract per se. It can become severable from the total contract, meaning that other parts of the contract that are not contested remain in effect”

      Stop paying your mortgage and see how far that argument gets you.

      “My point was that it contracted your opinion on the need for the bank to make that penalty to exist.

      “And like the due on sale clause, the prepayment penalty was thought to be OK.”

      The banks don’t need the penalty to exist…that’s why they rarely have such a penalty. The Due on Sale provision is not about pre-payment penalties…it’s about interest rate arbitrage. If it was about pre-payment penalties…then they would be inserting them more commonly into new loans.

      “The due on sale clause makes the 30 year fully amortized loan look like an interest only loan with a ballon payment.”

      Yes…because all of the risk is taken by the bank in the early stages of the loan. Why would any entity possibly loan you money without the ability to secure their profit as soon as possible ??? If you think it can be done better…pool a bunch of investors together…apply for a bank charter in your state…and offer these more favorable provisions. And when rates rise…let me know how you do. If it’s that great of a deal…you should be able to issue loans in huge numbers.

      “A new borrower after fifteen years would realize little income to the bank, and conversely a new borrower before the fifteen years would realize more profit for the bank at the expense of the original borrower.”

      “So it seems that you favor the institution over the person”

      And the borrower after 15 years has the right to not sell his home…which has become his paid for asset. The bank should have the same right over their asset…which is the loan. On one hand you want the consumer to have the right to control their asset…but the bank should not be entitled to the same rights, but rather let the consumer control both the bank’s asset as well as their own asset. Obviously the bank makes more money on the new loan. They’re in business to make more money. And borrowers can freely choose to engage in lending with them if they so desire. That’s what makes a market. If we actually ran the banking system in such a way…the ability to play arbitrage so easily against the banking system would crush the banking system. I am not on any side other than that of a relatively free market. If you don’t like the terms of the loan offered…don’t apply for it. There are plenty of investors who are not concerned with the upfront interest rate charged…because they know that it’s the cost of doing business. If you’re buying a potentially appreciable asset…and only you will benefit from that asset appreciation…not the bank…then you must compensate them adequately for the risk they take…so you might profit. The same is true with a margin loan. The interest compounds monthly…and when you sell a security…the brokerage firm has to get paid first. Because they too all the risk. If you don’t like…don’t borrow the money.

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      I am really sorry, but you have missed every point that I made, and I doubt that repeating them would make your response any different.

      For example, my statement about the dot com was not in connection with GSA. it was only an example of how bypassing the safeguards of investing, there was a creation of a ponzi type device. This is where the initial investors are the only ones that make the profit on stocks that should have never been traded publicly. Certainly not in the same manner as blue stocks.

      The sub prime couldn't have happened if the GSA had not been repealed.

      The bundled derivatives were hiding the bad loans and that was one of the triggers of the collapse.

      This is just one point that you missed.

      The fact that the economic collapse happened is all the proof you need that the system was out of control from the government and everyone connected to it, including the Real Estate people themselves. While it had different causes, the method of developing a bubble is the same between the dot com and the subprime.

      Everything to make the bubble work was a system started by the government with the everyone should be able to own a home, to enabling devices that did away with the conservative safeguards of investing.

      As you are a professional in part of the field of economics, I don't understand your position. The economic collapse was not subjective, it is factual and it can be traced starting several years before it.

      No one, not any of the army of economists saw the coming of the collapse. The ones that might have seen it, were not able to stop it. The government started the ball rolling by making the safeguards go away, and without that the collapse wouldn't have happened.

      Also, if the FRB would have raised the rates even a small amount, many of the loans would have failed, and new loans would have been prevented because of the higher interest rates. This alone could have turned an economic collapse into an opportunity for an economic correction. But, the government kept on with its everyone can own a home.

      The banks are not protected from default because a loan is twenty years into a thirty year term. It is protected by the up front down payment of the buyer, or the mortgage insurance for conventional loans.

      Many of the loans involved negative amortization in which the bank has no real protection. That is a risk that the banks took, plus they invented new loan devices that also increased their risk. They didn't care because they knew that FDIC would be there, plus the big banks knew that they were too big too fail.

      Lets not go through the salad again, where is the beef?

      I am not a professional like you, but I have the facts going for me.

      The Economic Collapse happened when the subprime bubble burst. The fact the TARP was a Hail Mary Play to give the people the illusion that the government was handling the collapse is supported by the failure of TARP to recover the economy. So the new congress put another amount close to TARP into play. The economy still didn't recover, and the FRB started investing hundred of billions into the bundled derivatives that would have also failed without those investments.

      Thanks

    • LandmarkWealth profile image
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      LandmarkWealth 2 years ago from Melville NY

      “For example, my statement about the dot com was not in connection with GSA. it was only an example of how bypassing the safeguards of investing, there was a creation of a ponzi type device.”

      I never suggested safeguards were not bypassed in the mortgage industry. I am simply pointing out that it was not the banks or the central banks that did it. It was the GSE’s via the congress.

      “The sub prime couldn't have happened if the GSA had not been repealed”

      That is not true. Subprime loans were around for decades before the Glass Steagall Act was repealed. The CRA mandated subprime lending as far back as 1979.

      “The bundled derivatives were hiding the bad loans and that was one of the triggers of the collapse”

      I think you mean bundled CDO’s. CDO’s are fully funded derivatives and the only derivative that holds an actual loan. And CDO’s as a whole are not a bad investment vehicle. In fact they have seen some of the best returns in recent years. Pooling loans reduced risk…it doesn’t increase it. And many of those so-called bad loans were actually performing loans. They were forced to be marked down in price because liquidity dried up, and the accounting rules put forth by Sarbanes Oxley forced them to mark to market pricing. So a loan where the homeowner was actually paying their payments on time was still marked down to near worthless. Once liquidity increased…the profit had to be recaptured. The default rate was only about 7%. Hardly catastrophic. The issue is not the creation of the CDO…it’s the artificial demand for them created by congress. You can get an asset bubble in the price of anything if the gov’t creates artificial in-organic demand. It could happen with the price of popcorn if the gov’t so fit to socially engineer its price.

      “While it had different causes, the method of developing a bubble is the same between the dot com and the subprime.”

      The method here is completely different. One is organic…the other is not. The dot.com bubble was hardly catastrophic because it was quite isolated…just like the biotech bubble of the 1980’s. Both were not forms of social engineering. When the market is socially engineered, the gov’t can continue such engineering for decades until it becomes completely out of control. It is not possible for a bubble to get that big without gov’t interference.

      “The economic collapse was not subjective, it is factual and it can be traced starting several years before it.”

      Yes…and it is clearly traced to the front door of the congressionally controlled GSE’s and the ridiculous mandates placed on banks by HUD Secretaries and the CRA.

      “No one, not any of the army of economists saw the coming of the collapse”

      Except… Taleb, Shiller, Roubini, Whitney, Schiff, Rajan, Rogoff, Aronstein…and about 2 dozen others I could name without doing any research.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      “The government started the ball rolling by making the safeguards go away, and without that the collapse wouldn't have happened”

      That you got right…and they kept the ball rolling. It rest nearly 100% on the congress and those who were charged with managing the GSE’s and generally committing outright accounting fraud.

      “Also, if the FRB would have raised the rates even a small amount, many of the loans would have failed, and new loans would have been prevented because of the higher interest rates.”

      The Fed did raise rates before the crash…multiple times.

      “The banks are not protected from default because a loan is twenty years into a thirty year term. It is protected by the up front down payment of the buyer, or the mortgage insurance for conventional loans.”

      Most loans don’t have PMI coverage. That is only mandated with less than 20% down. And the down payment is only nominal protection. Because when a bank forecloses…they usually still lose money. That is the last thing they want to do. The homes then sells for a deep discount, and they are stuck with the cost of maintaining the property in the interim. That’s why banks avoid foreclosure at all costs. A few years ago they were even paying people in default to just leave the home without damaging it.

      “Many of the loans involved negative amortization in which the bank has no real protection. That is a risk that the banks took, plus they invented new loan devices that also increased their risk. They didn't care because they knew that FDIC would be there, plus the big banks knew that they were too big too fail.”

      No…they didn’t care because they didn’t have to service the loan…they could sell it to the GSE’s who would buy up any paper the bank issued. It’s called social engineering. If you sold coffee cups for a living…and the gov’t was placing orders for them by the billions…would you care if you knew there aren’t enough coffee drinkers to use them ??? Of course not. You’ll keep making them…as long as the gov’t is willing to buy them from you. You’re simply reacting to demand. Then one day the Gov’t agency placing the orders goes under…and you’re stuck with a load of un-needed coffee cups in inventory…and nobody to sell them to. If they just let you sell coffee cups based on organic demand…we could avoid the coffee cup bubble.

      “The Economic Collapse happened when the subprime bubble burst. The fact the TARP was a Hail Mary Play to give the people the illusion that the government was handling the collapse is supported by the failure of TARP to recover the economy”

      TARP was not designed to recover the economy (meaning create demand)…it was designed to prevent a bank run…which it did. The stimulus was for recovery purposes…and that was just a poorly administered program, because the gov’t is not good at allocating resources. And the Fed is not investing into the economy. That’s what you’re missing…When they buy bonds, they are buying gov’t debt. They are just placing currency into bank reserves which the Fed can drain at any time they wish. The money is not somehow spent and unrecoverable. The risk of Fed actions is more of an inflationary concern. Meaning can they drain bank reserves timely enough when there is ever a real uptick in demand. Because money is essentially endogenous money with a fiat currency. We don’t know the answer to that yet. Most likely they’ll be late again as they consume too much data to be timely. The jury is still out on that one. As of now…the demand is not strong enough to be a concern. But that will change eventually.

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      Maybe we have some agreement on some things.

      Although it is more than coincidence that the bubble burst when the FRB raised the rates. Which is what my contention was, if they had done it earlier in the program.

      Thanks

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      I am sure we do have some agreement. And I also agree they waited too long to raise rates. I would say the same about the current environment. Just don't be too hard on the banks. They get plenty of negative press for things they have no control over. What I was trying to convey is you are not always aware of the cost to originate a loan when you work outside of the banking industry. Another quick example is mortgage tax. In NYC the bank is required to pay the mortgage tax on a new loan. So a 300k loan is about 7k out of pocket for the bank. If you paid the loan of quick...they take a beating. That's part of the reason bridge loans are so hard to get now. And another good example of up front bank costs that many people don't realize they incur.

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      Well that may be true in NYC, but here in California the borrower pays almost all of the costs. From my experience with banks, I don't have any sympathy for them.

      After 2008, I have heard horror story after story, about how the banks wouldn't take cash offers to unload their underwater loans. Brokers would have to pursue them month after month to get the property bought for their clients.

      I don't know how it looked in NY during that time, but it was a totally uncooperative banking environment. The equity loans from 2008 produced an unnecessary tax for people that were bankrupt, and losing their homes. The IRS treats these bank forgiveness as Income.

      I grew up in Hicksville, NY and the property taxes there are ridiculous going back to their foundation, I believe which was in 1932. The school tax is a real drain on the home owner.

      NYC is a tax monster, it gets some many taxes they should be located in CA. Although you are in Suffolk County, the Town of Oyster Bay has the best trash pickup, I have encountered. You put something out to the curb and it disappears. In Orange County CA, you have to call for a special pickup.

      There is also a difference in Property Law between CA and NY.

      In NY you go to a lawyer to sell the property, and the lawyer does the property search. In Ca, the Title Insurance Company does this through their Title Insurance, and this protects the lender. They use a tract index that is updated everyday from the courthouse. The title insurance also covers flaws in the title that couldn't be found in a title search, like adverse possession.

      Have you done or have you thought about doing a hub on Credit Cards, or getting the best out of 401ks?

      Thanks for the hospitality.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      Mortgage tax and many other costs are different from one location to another. Banks pay the tax in NYC but not in Long Island.

      A lot of the banks not selling underwater properties was just due to backlog in getting to them. I tried to buy a foreclosure back in 2008 and the listing broker wouldn’t even give them my bid because I was using another buyer’s broker. He didn’t want to lose half the commission. I tried to call the bank and let them know they were missing out on a better offer. But you couldn’t get anyone to talk to because they were so overwhelmed. But they have nothing to gain by taking on foreclosures.

      Most debt forgiveness is taxable income to the IRS, not just mortgages. If you settle with a credit card company, you get taxed on the forgiven debt as well. I don’t think it’s fair to call that the banks fault. If you’re an adult…you have to be responsible for your actions. If you borrowed the money…it is your responsibility to pay it back…and nobody else’s.

      Yes…taxes in NY are mind boggling. I am well into the 5 figures on my property taxes. 70% of it pays for the public schools and my kids are in private school.

      I have written some on debt and tax advantaged savings already. These are a bit older and need updating to the new limits.

      https://hubpages.com/money/Retirement-Savings-Redu...

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      I will look at the link after my comment. Thanks

      My point on the IRS is that it subverts the reason why we have bankruptcy laws. Much of the debt especially in credit cards is late fees, other fees, and interest becoming debt and causing more interest.

      My point is that the real debt is the actual products or services paid for with the credit card. But, making interest the debt and then paying interest on that is what causes large five figure credit card debt.

      The revolving credit card with high interest rates is difficult for a lot of people to pay off, especially when they have lost their job, or have had large medical bills, and any number of things.

      We are probably going to disagree on the credit card issue. But using South Dakota for headquarters allowed credit card companies to charge usurious rates. Not usurious in SD, but in the states of the credit card holders. This was made legal by the Supreme Court, but it shouldn't have been decided that way.

      How is a person that is filing bankruptcy going to pay taxes on five figure debts. The IRS forgives taxpayer debts all the time without additional tax consequences, so why not take their foot of the head of someone desperate enough to go through bankruptcy.

      Didn't mean to start another branch here, but it is not fair. It is not like they can use bankruptcy, like people can use abortion every time they get in trouble.

      Private schools are the way to go even though it costs you twice. You must live north of the LI Exp where property gets really expensive as you go towards the sound.

      I must also apologize for taking my comments off the principal purpose defined by your hub topic. As for the contents of the hub, I totally agree with your opinion. It is sound advice which I have used successfully myself.

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      I went to the link you provided, and I agree with it as well.

      Do you have one on looking to the future, and how it will affect your social security, and what are the magic years for mandatory distributions on 401ks?

      Thanks

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      Interest and fees are still debt because that is the revenue source that allows the company to loan you the money to begin with. Without them…there would be no loan. So the forfeiting of the debt is lost revenue to the credit card company for the loan they made, which then has to be deductible. So a deduction has to be offset by taxable income somewhere.

      It is true that getting out from under credit card can be difficult and very good reason to stay out of debt. Practically speaking…if you lost your job and had to settle with the credit card company…the fact that your income went down from losing your employment most often means you still would have zero tax liability on the forgiven debt. Because the deductions against taxable income without employment income would usually be sufficient to bring you to a near zero liability.

      Bankruptcy laws protect numerous assets from the reach of creditors, which is part of the reason credit card companies charge so much in interest. They are not collateralized loans, and they can’t go after things like 401k’s and IRA’s. So if you don’t secure the loan with an asset…you pay a much higher cost.

      I do live on the north shore. Property taxes are beyond outrageous.

      Predicting the impact of 401ks on SS is tough. I expect it to be possibly means tested in the future. But that is not a certainty. SS is much easier to fix if the will power was there. Medicare is a much bigger entitlement problem. There is a hub on the topic of taking required distributions which is in my profile. The options there are minimal. Once you’re 70 ½ the only real way to avoid the taxation is to pay the mandatory distribution directly to a charity if you’re charitably inclined. The first 100k in distributions is tax free when paid to a charity.

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      Thanks for the information and the discussion.

      I will wait for you to post a hub on credit cards, before pursuing that discussion with you.

      I just saw an interesting documentary on 157 Madison in NYC, that building alone will generate serious revenue for the city.

      You work at the other end of Manhattan but they say it can been seen from there.

      Anyway, we don't have to agree.I just am against taxes for governments that don't provide the services requisite to support them. Government doesn't run like a business, but arithmetic is arithmetic, and if we ignore the color of the total and make the change a responsibility of the taxpayer, then the math is as important as it is in the private sector.

      The power to Tax is the power to destroy. I am just repeating that statement.

      Have a great weekend.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      I actually don't work in the city anymore. My offices are Long Island.

      I am no fan f gov't. It is slow and inefficient. And I believe gov't should provide only that which is essential to the role of gov't...meaning only that which cannot be provided for privately. (Courts of Law, Emergency Services etc.)

      That being said...gov't also can't run like a private entity when it comes to the math. At least not on a national level. Think about it for a minute. A private business wished to always have a net positive free cash flow. If you operate in the red in perpetuity...you would go out of business. But a national gov't is responsible for the creation of currency. So the opposite is true. If the Federal Gov't ran a surplus every single year...they would eventually completely eliminate the national currency. So you can't really expect gov't to work like the private sector. Gov't needs to simply be restrained.

      This is the best explanation on the topic I can give in my own words.

      https://hubpages.com/politics/Money-Creation-The-I...

    • bradmasterOCcal profile image

      bradmasterOCcal 2 years ago from Orange County California

      LMW

      I wrote my response in the hub for the link you provided for me.

      Thanks

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