The Shills Are Howling (And That’s Good)

Braying Jackass - Dick Bove

Listen to this crap:

For Bove, the end of Fannie Mae and Freddie Mac will radically shake up the kind of mortgages most Americans will get.

“If Fannie and Freddie go away, what then happens to the mortgage markets?” asks Bove. “The answer to that question is that we no longer have things like 20-year and 30-year mortgages because banks are not going to put that type of mortgage on their balance sheets. And we won’t have fixed-rate mortgages.”

So what?

Unlike the rest of the developed world, most homes in the US are bought with long-term fixed mortgages. Prior to the Great Depression, mortgages often required 50% down with interest only payments for five years with the principal due in full after those five years were up.

Yeah, the good old-fashioned “balloon note.”  We didn’t have fancy computers then or the banks would have screwed the people in the 20s just like they did in the 2000s.  But since you had to be able to figure out the interest with a piece of paper and a pencil (or its rough equivalent) the sort of fancy-pants garbage (negative-amortization and similar) was impractical, as was securitization.

Nonetheless the banksters managed to figure out how to get people to use lots of leverage anyway with balloon notes — and huge percentages of those “buyers” lost their house when they discovered that they had inherent gearing of 5:1 or even more.

Bove continues:

“If your mortgage cannot be a 30-year fixed-rate mortgage – [if] it’s a 10-year adjustable rate mortgage – then, the monthly cost of owning a house goes up dramatically,” says Bove. “And, if the monthly cost of owning a house goes up dramatically, the price of the house goes down. There is no equity buildup in order to have home equity loans in order to buy cars, boats, what have you. So, it has an impact on the overall economy, not just Fannie Mae and Freddie Mac.”

So Bove, who claims to be an “analyst”, doesn’t understand that this is all a balance sheet?

Or is he intentionally omitting that little point?

Because if you have a 10 year adjustable rate mortgage after ten years you no longer have any payment at all.  Even better you pay a lot less in interest during those ten years.

How much less?

Let’s take a 30 year mortgage for $200,000 @ 6% interest.  Your monthly “nut” is $1,193.14.  Over 30 years you give the bank $429,528.73 in earned income to “pay” that $200,000.

Now let’s assume the mortgage is for 10 years at a 5% interest rate.  Your monthly “nut” is roughly double — $2,112.521.  But — over 10 years you give the bank just $253,500.98.

The $176,027.75 you do not give the bank will buy a hell of a boat and a whole bunch of cars, all of which you will be able to buy for cash!

And that assumes the price of the house doesn’t get cut in half.  It will.  Now you have $302,778 more in your pocket over that 30 years of time, and you have the same place to live that you would have had with Fannie and Freddie “in the market.”

Now there are those who will argue that it’s all a “wash” because you “build equity.”  That’s false — the additional interest you pay is gone from you forever, and goes to someone else.

Sure, if you happen to own a million dollar house you might be very interested in not seeing the price cut in half as these unsustainable and ultimately bogus “financing” options disappear.

But if you do not own a house now then would you rather pay $100,000 for it — or $200,000?

People like Bove need to be publicly called out, shamed and shunned — and that’s being charitable.

The Market Ticker

Go to responses (registration required to post)