Tuesday, February 3, 2009

How the Banks Are Making Things Worse: Trying to Lock an Adjustable-Rate Mortgage

When we bought our current home, back in August 2001, we had a long discussion first. The place seemed perfect for us, but how badly did we want it and how long were we likely to stay? Because surely we had to be buying at the very top of the market; could we hang on through the 25% drop in real estate values that was bound to be coming in 2002?

To our astonishment and alarm, for the next five years or so house prices continued to climb, and the value of our (already-overpriced) house doubled. If you looked at family incomes in the area, if you looked at average rents, if you looked at any sensible indicator of value whatsoever, the assessed value of our house by 2005 was insane and unsustainable.

The value of our house has since tumbled about 30% in value and everyone in this city is whining about how ‘undervalued’ real estate now is. It’s still up probably 45% from the overpriced values when we bought it, and I’d guess it’s going to tumble at least another 20% before it stabilizes. Everybody is crying out that we need to get the economy back to ‘normal,’ and by ‘normal’ they seem to mean 2005. Well, sorry. Stocks need to have some relationship to corporate earnings, and house prices need to have some relationship to the income people have to pay their mortgages, and those factors have been wildly out of line with reality since about 1998.

This is on my mind because a real estate appraiser is coming by this afternoon to look at our house. Despite the credit squeeze, we’re refinancing.

Why refi? Because in addition to our basic fixed-rate mortgage, we have a rather modest second mortgage (actually a home-equity loan) on an adjustable rate. Adjustable rates have always made me nervous, but our banker pointed out that at any time we worried that rates were headed up, we could ‘lock’ the balance at a fixed rate for probably 0.5-0.75 above the current adjustable rate.

Our adjustable rate is now down at 4.25%, which is about as good as it gets, so we called the bank and asked them to lock it, expecting to be quoted a fixed rate of 4.75-5.00%.

The rate we were quoted to lock it was 9.60%. The bankers themselves were shocked by the number, and at a loss to explain it.

Can you believe it? In the middle of a foreclosure crisis, brought about in part by rising rates on adjustable-rate mortgages, when the US prime rate is orbiting zero percent, these bastards are charging almost ten percent annual interest to convert a loan to a fixed basis?

Now, this isn’t a crisis for us. We have the option of simply refinancing the whole mess, rolling our second into our first and taking on the total at a fixed rate of 5.3%--which is lower than the rate on our first mortgage, and will lower our total monthly payments. So it’s a no-brainer for us.

But not everybody is in a position to do what we’re doing. There must be thousands—maybe millions—of people out there who are trying to convert adjustable-rate mortgages to fixed-rate mortgages, and are being told that this will double their interest rate, sending it to murderous levels. Talk about predatory lending. The people most likely to be driven into default when interest rates head up again are those who are being screwed right now when they attempt to take judicious action. This is the last thing our economy needs.

Or, as Nobel-laureate economist Paul Krugman wrote in a recent article:

…[A] Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers, President Obama’s top economic adviser, “think governments make poor bank managers” — as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.

Nationalize the bastards. Government isn’t good at running businesses? True. But they couldn’t possibly do any worse. Mattel’s Totally Hair Barbie™ couldn’t do any worse than these clowns.


Janet said...

Your banking system certainly needs a rethink, that's for sure.

Last I checked, our variable rate was below 4%. And it's the rate that varies, not the payments. As the rate fluctuates, the number of payments will vary, not the amount we pay each month (well, bi-weekly in our case). I'm not sure this idea has ever occurred to an American bank.

Remember when banks were thought of as rocks of stability and probity?

David Isaak said...

Hi, Janet--

Well, a lot of people down here have always thought they were a pack of thieves, so I don't know about the probity bit. But stability, certainly.

As far as I know, no one has ever used the varying-payment model in the US. It sounds like a damn good idea, though you may have to explain it to them slowly, using words of no more than one syllable.

Obama still needs economic advisors. Pack your bags!

Janet said...

Hm. Mortgage (two syllables). Payment (two syllables). I think the job requirements surpass my skills.

And I'm actually in PA right now, trying to annex it. No luck so far.

David Isaak said...

Hi, Janet--

Well, you could use "loan" instead fo "mortgage." But "payment" has me stumped.

Annexing PA? We've always expected the Northern barbarian hordes to fall upon us some day. Just stay east of the Mississippi, okay?

Janet said...

Barbarians? Here I am telling you about our oh-so-civilized banking system and you still consider us barbarians?

I take umbrage, sir.


In actual fact, we're taking over your banking system through the back door, but in the tradition of the Normans, I fear, we are being assimilated by our subjects.

Ever wondered what the TD stood for in TD Bank? Or who really controls Harris? The barbarians walk among you...

David Thayer said...

Your experience makes me wonder why the Treasury cannot seem to create a Bad Bank when we have so many shining examples before us. ( It might be kind of fun to work at Bad Bank like Superman in Bizarro World. Jimmy Olson kicks ass. Or imagine Woody Allen's character from Take the Money and Run trying to rob Bad Bank; maybe the tellers pull guns and force people to make deposits.

David Thayer said...

I think TD is Toronto Dominion.

Janet said...

DT, you win the cigar. At least three of Canada's national banks have major holdings in the States. As far as I know, they haven't helped inject any sanity into the system. But I'm not well-informed.

David Isaak said...

Hey, David--

That's a great idea. The Bizzaro one might be a little hard to pull of, unless the Bush Administratin comes back to office, but we could probably do the Woody Allen bit.

I thought "TD" stood for "Ta-Da!"

David Isaak said...

Hi, Janet--

Ah-ha! Now we know the origin of our problems!

Are you familiar with the song "Blame Canada" from the fine film South Park: The Movie?

Times have changed
Our kids are getting worse
They won't obey their parents
They just want to fart and curse!

Should we blame the government?
Or blame society?
Or should we blame the images on TV?

Heck no!
Blame Canada!

Blame Canada!


Janet said...

Not a South Park fan, but I was aware of the song. I found it pretty amusing.

But it's really so much more fun to blame the US. LOL

Jen Ster said...

AMEN. We bought our condo in San Diego in 2000 and sold it in 2004. In the five years between, it doubled in price. Now, it was a frick'n 800 square foot condo in a not very good part of town. There's no way it was worth what a six-bedroom ranch house on an acre of land would run you here in Dallas. I even had an argument with our realtor about the listing price because I thought it was too high. Then we got three bids in 36 hours OVER the price she had suggested.

We took the bid of the first couple who came to see the place, whom I got to meet and rather liked. Their bid happened to be the lowest. My realtor hates me. But anyway: I was on "Realtor.com" the other day and was rather surprised to see that condos in my old nabe were still going for similar prices - though a rather distressing majority of the ads said, "Bank owned." You gotta wonder how great it is to have real estate prices so high that everything ends up in repossession. Not even the banks benefit from that; they try to unload them as quickly as possible - which makes me wonder how much the same condo was selling for in mid-July of 2008.

David Isaak said...

Hi, Jen--

A realtor I know said that most people define "a fair price" for their property as "the highest price anyone in human history anywhere has ever paid for a similar property." Apparently banks believe this too.

The weird thing is, we've been here before. When we moved back to California in 1995, the early 90s property bust was still happening. Most of the properties we looked at were bank sales of houses where the owners had negative equity. We bought a four bedroom house in a good San Diego neighborhood for under $200 k.

But, then, that was thirteen years ago. We can't expect corporations to remember, like, ancient history and stuff. I mean, 1995 was before Viagra.

Janet said...

Well, I just found out that Canada's banking system ranked #1 according to the World Economic Forum. So I wasn't just blowing hot air...