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Haven't banks learned anything from this mess?

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July 01, 2010 – Comments (4) | RELATED TICKERS: BAC

As someone who is stuck in the middle of rate land with a 5.75% 30-year fixed mortgage on my home, I

peek at what my bank is offering on mortgages from time to time in hopes that I may be able to lock in a

4.75%, zero point, 30-year fixed to take advantage of the fact that rates are at record lows.

One would think that banks would have learned their lesson during the recent implosion of the housing

/ credit bubble and that they would be much, much more conservative in the types of exotic loans that

they offer today.

 

Unfortunately, that doesn't seem to be the case with Bank of America.

 

Here's the list of available loans that comes up when I query the rates in my area:

Really?!  They're still offering 5-year, interest-only ARMs?  Good grief.

Deej 

4 Comments – Post Your Own

#1) On July 01, 2010 at 9:34 AM, JakilaTheHun (99.94) wrote:

Doesn't seem like that big of a deal to me.  The APR is variable.  Interest rates are plummetting right now, as money supply is dwindling.  Earning 4% isn't the end of the world; and if rates go up, they earn more. 

A 4.875% fixed rate mortgage is really a spectacular deal for the consumer.  The 4.0% ARM probably benefits the bank more, unless we spend an entire decade with dismally low interest rates. 

I'd actually argue that the banks have no choice but to offer these types of products right now.  They have absolutely no other way to make money.   Until the demand curve for loans shifts back upward, banks are forced to offer these types of packages. 

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#2) On July 01, 2010 at 9:44 AM, TMFDeej (99.40) wrote:

Hey Jakila.  I always appreciate your comments, they're always both civil and intelligent.

The rate is not the part that I have the problem with. 

What happens when someone who takes out one of these loans with minimal equity in their home sees their payment skyrocket when rates inevitably rise several years from now?

What are the odds that they default on their loan? 

I would guess pretty high.  Certainly a lot higher than they would be on a conventional 30-year fixed mortgage.

Exotic loans like this are part (certainly not the entire problem but part) of what got us into this mess to begin with.   

Deej 

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#3) On July 01, 2010 at 10:01 AM, JakilaTheHun (99.94) wrote:

What happens when someone who takes out one of these loans with minimal equity in their home sees their payment skyrocket when rates inevitably rise several years from now?

My guess is that they are requiring at least a 10% down payment.  I could be wrong on that, but if that's true, that would help protect them somewhat. 

If someone takes off, it might not be a huge deal.  Obviously the bank doesn't want that to happen, but future defaults are not going to be as big of an issue as the current defaults simply because housing prices have less room to fall now.  A 10% - 20% drop isn't as devastating as a 30% - 50% drop. 

As far as borrowers bolting when interest rates go up, I don't think that's likely, because the underlying economy will have to improve for that to happen.


I don't like the fact that these sorts of loans are available, but given the current interest rate environment, I see this as inevitable. Banks can't make money without products like this until interest rates go up.

 

Exotic loans like this are part (certainly not the entire problem but part) of what got us into this mess to begin with.  

I used to believe the exact same thing, but the more I examine this crisis, the more I begin to disagree with that argument. Rather, I believe that exotic loans are merely a sympton of a deeper macroeconomic problem.  This problem can not be fixed until the demand curve for loans shifts back upward towards higher interest rates.  The demand curve is being held down by currency issues and mercantilist policies in East Asia.  

Just my opinion on the macro stuff; but on the micro level --- I don't think the banks have much of a choice. 

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#4) On July 01, 2010 at 11:21 AM, Teacherman1 (58.21) wrote:

I expect they are looking at more like 20% down. 

They will also be looking at full documentation; not the "sign and move in" if you can walk upright and are breathing loans that were a big part of the "crash".

JMO and worth exactly what I am charging for it.

Have a great day in the world of "buying opportunities".

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