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Prime going delinquent

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April 22, 2009 – Comments (8)

This topic seems to be in the news today, here is Big Picture on it.

I have written on the destructive nature of low interest rates in my post "Low Interest Rates: As Destructive as Usury?  You can borrow a heck of a lot more money yet your ability to pay back the debt early is completely slaughtered.  Many did well in the past by reducing the amount of interest they actually had to pay on debt by repaying debt early.  With low interest rates that advantage is lost and the implications to all future financial planning is beyond enormous, it is debt slavery.  The lowering of interest rates is only good for people who already have debt and are able to reduce interest payments and free up money for other things.  It is a disaster for people taking on debt.

I have written further and in more depth on the topic in Six Degrees of Leverage.

I also did a write-up on what lending standards should look like if you want a strong foundation in the economy, Sensible Lending Standards.  I did this one using docstoc because of how difficult it is to format blogs with the existing tools, but that has reduced readability, so I might go back and actually put the hours into formating it for a blog at some point.

Looking back some of what I have in the latter post I have also outlined with my personal example of how it would affect my ability to borrow in Subprime, Spending and Lending Laws.

 

 

8 Comments – Post Your Own

#1) On April 22, 2009 at 10:19 AM, alstry (36.32) wrote:

So where do you think this is all going?????

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#2) On April 22, 2009 at 10:20 AM, dwot (45.58) wrote:

Market Ticker also has a post on this and the reasons for prime deliquency got my attention.

"Of all borrowers who ended up in default, 34 percent told Fannie and Freddie they were earning less money, about 20 percent cited excessive debt as a reason for missing mortgage payments, and 8.1 percent blamed unemployment"

I bought my last home about 5-6 years ago and two years into owning we both had income reduction hits, 20-25% decline in income.  I have had my income decline numerous times.  Because of sound borrowing practice on my part we had no risk of losing our home, but it also meant being home poor until age 60 and no opportunity to prepare for retirement.

This income decline thing is going to be far more common to many more people moving forward and is something younger generations have had to deal with far more frequently then older generations.

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#3) On April 22, 2009 at 10:25 AM, outoffocus (23.48) wrote:

And yet people mock me when I say I choose to rent.  I think eventually this downturn is going to cause home prices to drop so low that people will be able to buy homes with cash (those who paid down their debt and saved). When I tell people this they think I'm crazy but if anyone asked me if they should buy a home within the next year or so I would tell them no. 

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#4) On April 22, 2009 at 10:39 AM, devoish (96.39) wrote:

Deb,

Those are some of the best posts you have written, and that is saying alot.

Thanks.

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#5) On April 22, 2009 at 10:48 AM, catoismymotor (< 20) wrote:

Thank you for writting this. l'll have to delve into your other articles tonight at home.

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#6) On April 22, 2009 at 7:07 PM, MikeMark (29.54) wrote:

That's interesting, but only true if you max out your borrowing. If you practice sensible borrowing & planning, lower interest rates may give you the ability to engage in an entrepreneurial pursuit.

On the other hand, that's really part of the problem with the central bank's ability to set interest rates. The entreprenuer uses the interest rates to predict the viability of the endeavour. When the rates don't reflect the true market because they have been changed by a central bank, the calculations are off. The entrepenuer then makes a mistake because of bad data. If this goes on for long enough, the massive mal-investment that occurs creates a recession or depression.

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#7) On April 22, 2009 at 7:48 PM, MikeMark (29.54) wrote:

Deb,

You wrote in your blog on Low Interest Rates:

Probably the most important disabling point for newer buyers is that low interest rates are a function of inflation. Low interest rates mean inflation is lower, which means wage increases are lower.

I want to explore some thinking: When a central bank sets interest rates low it does so by increasing the money supply. It inflates the money supply. Inflation is higher. This can cause prices of various asset and commodity classes to change. How exactly they change depends upon the actions of everyone in the economy, but generally it's accepted that more money supply means higher prices of items.

However, I think you've also hit on part of what's been going on for the last 30 - 100 years. Wage changes are often defined by the set rates and things like CPI which are determined by government, but have no truth to them. You ask the woman on the street if CPI defines her inflation experience and the answer is usually, "No." But her wage change is based upon it, not upon any true measure of inflation. So true inflation can be high while wage changes are low. People are able to afford less over time, but have bought into a large constant ownership like a home. Eventually you get a recession or depression. (wow - I just came to that conclusion twice! Both times caused by the central bank.)

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#8) On April 22, 2009 at 9:12 PM, dwot (45.58) wrote:

MikeMark, I was follow a logic that when rates are low inflation tends to be low, they do not follow each other exactly.  The point being that when people were getting 5-7% raises each year in the 70s the cost of their debt was declining considerably relative to their income and that freed up a greater percent of their income for other things.

Outoffocus, I think home buying does depend on where you live.  Right now I there are places where price declines have been going on longer and price have gotten reasonable, and then there are places that are still way out of line.  My friend's condo in Florida is right back to where it was before the bubble yet units around her were selling for more then double at the peak.  Will they go lower?  Maybe, but buying where she is right now would not be a destroy your financial future kind of decsion, like a friend of mine who just told me he's bought a place.

Thanks Devoish, I think it is some of my best analysis as well, although very long to read through.

alstry, I doubt there will ever be sensible lending standards as I propose.  It will always be about the limits you can squeeze a person without breaking them.

Thank catoismymotor.

 

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