TMFDeej (99.47)

Feds bailed out China, not the US / You're not going to believe what Countrywide told me and why I locked in a 30-year fixed mortgage yesterday

September 12, 2008 – Comments (11) | RELATED TICKERS: BAC , FNMA , FMCC

Back in April I blogged about how I was considering refinancing my 6%, 10-year ARM mortgage into a 30-year fixed (see post: Time for Deej to refinance...the only question is when?).  Most of those who commented in response to my post said that the days of low mortgage rates are over and that I had missed the boat.  Well, I am pleased to say that yesterday I called my mortgage company, Countrywide, and locked in a zero point, 30-year fixed mortgage at 5.75%...which is lower than the rate that I could have gotten back then. 

Could mortgage rates drop by another quarter?  I suspect that they will (see post: Fed's next move could be to lower rates), but I was not willing to bet my family's money on it.  Anyhow, the purpose of this post is not to gloat that I got a good rate when others told me that I wouldn't, it is to talk about the mind-blowing things that the Countrywide representative who I spoke with said to me.  They included things like:

- "Have you considered an interest only mortgage?  We could do that for you."

- "We probably won't need to verify your employment or do an appraisal."

- "Are you interested in an adjustable rate mortgage"

You get the idea.  Mortgage companies seem to be up to their old tricks again.  Haven't they learned any lessons from the mistakes that they have made in the past?  Good grief.  Now granted, my wife and I have stellar credit, we have never been late on a payment with Countrywide, and we had an appraisal done when we bought our home just under four years ago, but still shouldn't these guys be erring on the side of caution.  This is some seriously scary stuff that I would find pretty annoying if I was a Bank of America (BAC) shareholder.

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While I'm on the subject of interest rates, Jim Jubak published an outstanding article on how it is likely that rates are headed much, much higher in the future.  I completely agree with him, which is why I locked in a low rate now. 

Feds bailed out China, not the US

Here is an amazing quote from the piece on the federal bailout of Fannie and Freddie:

"How is the deal cobbled together by Treasury Secretary Henry Paulson, the former Goldman Sachs (GS, news, msgs) CEO, bad for U.S. stocks and bonds and for the U.S. economy? Let me count the ways:

- The deal adds $5 trillion in debt to an already stressed national balance sheet. That basically doubles the U.S. national debt and can't help but push the U.S. dollar lower and U.S. interest rates higher in the long term. The U.S. government is going to have to sell more Treasury bonds to cover its new debt.

- Taxpayers are on the hook for somewhere between $25 billion and $200 billion. That's money that will have to come from higher taxes or from more government debt.

- The need to sell more debt to fund this takeover will lead to higher interest rates in the Treasury market. (This is besides the rising tide of the annual federal debt. The Congressional Budget Office puts the deficit at $407 billion for fiscal 2008 and a record $438 billion for fiscal 2009.) Treasury yields are the benchmark for everything from mortgages to credit cards to corporate loans. Higher interest rates on Treasurys will push up mortgage and other interest rates.

- The combination of faster growth in the money supply -- as the government sells more bonds -- and a weaker dollar will add to forces pushing inflation higher in the United States.

- The decay in the financial fundamentals of the U.S. government could finally lead to the United States' loss of its triple-A debt rating. A downgrade would force the U.S. to pay higher interest on its debt.

- Higher interest rates will lead to lower economic growth. The Federal Reserve calculates the U.S. economy can grow at 2.5% or so before it risks setting off inflation. The extra debt burden from this takeover will make it hard for U.S. growth to hit even that relatively modest target.

- And, yes, after being asleep for years as the problem grew and grew, the Treasury may not have had any alternative if it wanted to prevent an immediate meltdown in the U.S. mortgage market and in the U.S. financial system in general. But if the Treasury is serious about starting to shrink the mortgage obligations of Fannie Mae and Freddie Mac starting in 2010, the price of an immediate fix could be a double-dip slowdown in the housing industry in 2010. Less mortgage money available from Fannie and Freddie in 2010 sure isn't going to help the housing industry sell houses."

Amen Jim.  I couldn't agree with you more. 

Anyone who has floating rate debt should absolutely lock in a historically low rate right now. 

Anyone who thinks that the rally of the U.S. dollar is anything more than a blip in the middle of a long-term bear market for it is nuts.

Deej