Lead Story: It’s been a while since we checked in on the mortgage originators to see what they are up to since rising rates have chocked off their refinancing pipeline. At the same time that slowing home sales are starting to hit purchase mortgage originations which are showing signs of topping out. For quite a while now, I’ve been saying that lenders and originators would have a choice between:
- Right sizing their businesses for a down cycle (layoffs and down sizing) and dealing with lower volume.
- Lowering underwriting standards in order to bring more marginal borrowers in and prop up volume.
Thus far, the response has been somewhat bifurcated. The large integrated financial institutions (banks) are laying people off while the one trick pony mortgage originators appear to be getting somewhat more aggressive since every problem looks like a nail when your only tool is a hammer. It turns out that there is another option that I had (naively) not anticipated – outright trickery. To wit, I was pursuing Twitter this weekend when the following ad popped up, pitching potential marks…I mean clients to refinance into a new 30 year loan and re-set their amortization as some sort of money saving secret that banks don’t want you to know about:
Fortunately, I checked the replies – always a risky proposition when dealing with the cretins who inhabit Twitter – and nearly everyone on there was trashing the post as the sort of garbage and risky “advice” that it was. First off, a little simple math: restarting the amortization on your loan will often lower the monthly payment on your mortgage, even at higher rates. However, it will also cost you tens if not hundreds of thousands of dollars in interest during the life of the loan. For example, take a look below for an at what happens to both the monthly payment and total interest over the life of the loan if a mortgage originated in late 2011 were to be refinanced at today’s rates.
|Loan Amount at Origination||500,000||429,000|
|Amortization||30 Years||30 Years|
|Monthly Principal Payment 11/2018||953||530|
|Total Interest Over Life of Loan||360,000||386,000|
Yes, the monthly payment goes down. However, it comes at the expense of paying a lot more in interest since the refinance starts the amortization clock all over again at a higher rate.
I would have thought that this sort of advertisement would run afoul of regulations after the foreclosure crisis but apparently it does not. I suppose that its somewhat encouraging that the Twitter mentions were so negative but that is just tiny sample size. Some people will see this sort of thing and jump on it to lower their monthly payment, even though it will cause them financial harm in the long run. Unfortunately, we can probably look forward to more of this sort of thing in the near future as originators continue to grasp for a bigger piece of a shrinking pie for the remainder of this economic cycle.
Rocking and Rolling: The October non-farm payroll report was another strong one, with solid wage growth and strong job creation, all of which led to lower bond prices and higher interest rates. But See: Millennial men are one of the few dark clouds in the economy right now and their employment metrics still don’t look all that great.
Weight on Their Shoulders: New data showing that only half of college graduates who went to college in 1995-1996 had paid off their student loans in 20 years continues to indicate that the federal student loan system is a failed social experiment.
Metamorphosis: Brookfield Property Partners plans to spend between $800 million and $1 billion each year over the next few years to reposition or add office and/or residential space to 100 of the 125 GGP malls that they own.
Drive Until You Qualify: High housing costs mean that less-wealthy people are increasingly fleeing the Bay Area and Los Angeles for more affordable inland markets and being replaced by higher earners.
Priced Out: The high cost of housing in the Bay Area means that people making $400,000 a year are basically middle class.
Nuanced View: Nobel Laureate Robert Shiller says that the housing market reminds him of 2006 yet doesn’t think that the next downturn will be anything near as bad as the one that led to the Great Recession.
Haven’t Hit Bottom Yet: CryptoKitties, a blockchain enabled digital collectible game raised $15MM from some very prominent VCs despite a low daily user count because apparently some otherwise very intelligent people find it prudent to continue throwing cash into this fire.
Left Out: Amazon recently gave a much-publicized pay increase to all of its workers….except for its contract delivery staff that functions like Uber for packages.
Too Big to Fail: Despite years of scandal, fake news and data breach hacks, Mark Zuckerberg’s hold on Facebook is as strong as ever.
Chart of the Day
Lower income people who leave the Bay Area and LA are often replaced by high earners.
Strong Exit: A Tennessee man said “let’s rock” before being executed by electric chair because you always want to finish strong. (h/t Greg Wertman)
Bender: A drunk, shirtless man was arrested for barging into homes and seeking someone to fight him after knocking himself out by running into a fence because Florida.
Solid Logic: A man who was rescued after climbing into a well and getting trapped said that he went in ‘just to say that he did’ because Florida.
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