A few days ago, Ben Bernanke said that mortgage lenders should reduce the principle amount on loans to home owners to prevent major defaults. While this is quite a bizzare thing to say, at some level it makes sense. Rather than foreclosure on a house and sell it for 50 cents on the dollar, the lender might as well knock off 30% of the principle and keep collecting interest on the remaining 70%.
However, in principle I feel its the worst thing to do. Speculators who buy “investments” they can’t afford do not deserve to be saved and neither do the banks that lent them money – they both deserve to be punished. That is actually what recessions accomplish. They shake out the excesses of past booms and clear the way for fresh blood to have their chance at creating wealth. Remember what happened in Japan, where it is common for loss-making companies to be propped up by banks and the government? Their recession last for 15 years and it’s still not clear whether there are fully out of it or not.
Before I get flamed for being un-American by actively supporting a recession, let me clarify my position. There has been a world-wide asset bubble. The natural order of things is to let the bubble burst quickly so the next boom can start again. I resent a slow deflating of this bubble that Bernanke is engineering through his “soft landing”, which is nothing more than inflating the pricing of everything else (except wages). It will only serve to extend this down-cycle and will eventually result in the Federal Reserve losing its credibility and ability to manipulate the economy.
As if in deference to Ben Bernanke’s wishes, a CountryWide (CFC) rep called me today asking if I wanted to refinance my property since I had a 5 year ARM. I was surprized to hear that I had a 5 year ARM, since it was supposed to be a 10 year ARM! The rep explained that it was in fact a 10 year loan with a 5 year ARM, which I think was completely false since the rep sounded like a telemarketer rather than a loan officer. Anyway, he said I should refinance and suggested that I go for a 30 year fixed at the same rate as my 5 year ARM. When I said I wasn’t interested, he suggested that I find out whether I qualify for the Loan Modification Program.
A Loan Modification Program is where the bank extends the length of the term on the loan. So instead of the rate adjusting in 5 years, they can extend it out for another 5 or 10 years. So basically its like a no-doc refinance, only you don’t have to pay for it! This is a much better option than a no-cost refinance, which has a cost, but it’s actually rolled into the mortgage so you don’t pay for it upfront. Instead you pay for it over 30 years, which is usually a terrible financial decision. Even worse, you accept a higher interest rate and in exchange the bank picks up the cost of the refinance. That means you end up paying thousands of dollars more on your principle to save a few thousand dollars. Unless you’re planning to move in 2 years, that’s a really big, but common, blunder.
Considering that I don’t currently have any W-2 income, it should be easy to qualify for the Mortgage Modification Program. Since all my income flows through my corporation, and I don’t need to draw a salary, I’m technically unemployed. (I know what you’re all thinking but no, I don’t qualify for unemployment assistance). Even though I am gainfully unemployed, I still qualify for the modification program!
Don’t know if I’ll take them up on their offer though. I think things could get a lot more interesting over the next few years.
. If you don’t know what Yield Spread Premium (YSP) or Paid Out of Closing (POC) means on a HUD-1 you definitely should read this book. If you own a home and don’t know a HUD-1 is then get your spouse to smack you and then go buy the book! I promise you’ll save thousands of dollars on your mortgage.