Tuesday, October 25, 2011

BloggeRhythms 10/25/2011

The president announced a home refinancing program yesterday in Las Vegas. The plan, Home Affordable Refinance Program, or HARP, is intended to avert foreclosures by lowering interest rates for homeowners still current on payments by allowing them to refinance no matter how much their home's value has dropped below what they still owe.

Now, while phrases like, "lower payments," always seem to get people's attention, I've learned to stop and consider why that should be so. And that's because I spent my career in the commercial finance business which taught me a few things. Such as, there's no such thing as "free" or "lowest" anything's because entities have to stay in business and they can't do that by giving away the store. Therefore, buyers have to figure out where the loopholes are before they jump right into any purchase of anything.

So first of all in this case, in any financing arrangement there are five elements that comprise the transaction. The amount that's involved, in this case the net price of a house after any down payments. The term of the loan. The rate of interest. Any future value remaining at the end of the financing term, if applicable, and lastly, the payments.

So, what that means is, in order for lender's to derive a particular return on their investment in a home, they calculate the required payments predicated on the other four variables (term, interest rate, future value of the asset, if any, and down payment.) And if any of those variables devalue for any reason over the term of the loan, they lose whatever that amounts to.

In this case the lender isn't losing value because the home's that were financed are worth less, because payments were based on the original amount when the loan was transacted. However, the payments were derived on a higher rate of interest. Therefore, if payments are reduced now, without any increase in any other variables in the transactions, the lender's absorbing what's likely a considerable loss.

So, as far as the loss of lender's income goes, I don't know if or how that's covered, but I do know who the lender is, and that's Fannie Mae. And since that's the case, in one way or another the taxpaying public's likely absorbing the loss, as always with this administration. Which means successful folks are getting hosed again, it's just that the mirrors have been moved to different corners.

And I know I've used this analogy before but it's appropriate again, since it seems the only weapon the administration uses is the gullibility or lack of knowledge of the public. Because their methodology seems to be just like the crooked haberdasher who said to his tailor: Turn on the blue light Cecil, the man wants a blue suit.

That's it for today folks.

Adios

No comments:

Post a Comment