I don't understand something

[lovinlife4]

We currently have our home on the market and have begun looking for a new home. Our line of thinking was that we would be able to get a good deal on a mortgage right now because of the interest rate cuts. But when you actually get on the phone with these banks, they tell you that (for example) a $200,000 home would put you at 6.25% and really things haven't changed at all for the home buyer. Why? Why do all these big co's get rates of 2.25% and we have to pay 6% or higher? Can anyone explain? And who's looking out for us (besides God) I mean in the respect to the middle class or lower class? I don't get why the middle class basically holds all the important jobs and yet we get very little in return.

[firstoftwelve]

It's because the banks don't have enough liquidity right now. so they're taking the lower interest rates, but not passing them on to the mortgage rates, so that they have a larger buffer. They can make money on the morgages, and use it to "pay down" their lower interest rate loans. They don't care about the "average joe" they're just trying to keep themselves solvent right now.

that's the way I understand it anyway.
I've been told to watch the 10 year T-bond rates. when they are down, that's when mortgage rates go down.

[windtalker]

Many people say that now is a good time to buy because home prices are down and it is a buyers market, to that I would say yes and no, the reason I would say no is that while it is true home prices are down many experts think home prices still have a long way to go down.
Most of the homes that have been and are being foreclosed on are being bought back by same banks that hold the paper.

Mr. Mortgage is the go to guy on most these types of questions, you can e-mail him your question and he will answer, in one of his recent articles he said "the only way out of all this remains a national reduction of mortgage balances for everyone"

Then I found this article ......



``The better alternative is to initiate a limited mark-to- market write-down of private mortgage debt as envisioned in the Dodd-Frank Congressional proposal combined with government- subsidized loans at below market rates,'' Gross wrote. ``Surely Republicans, Democrats and Wall Street mortgage holders (Pimco included) can recognize that stability as opposed ....

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXKbz9TUtqI0&refer=home

here are a couple of links Mr. Mortgage

http://mrmortgage.typepad.com/blog/
http://mrmortgage.ml-implode.com/

[Rondaben]

Long post, but hopefully it explains.

I read an interesting article that brought up some points I have been seeing recently. The first shoe to drop in the current economic cycle was the default of sub-prime. This has spread to Alt-A (middle credit) loans and even to Prime loans. As of today, almost ½ of mortgage backed securities are rated CCC or lower—that is, they are in imminent danger of default.

This has caused a liquidity crisis at financial institutions. For lack of a better term, a run on the banks. There is approximately 8 trillion dollars on deposit in the banks of the U.S. That includes checking, savings, CDs, etc. It is the money that you have “stored”. Banks make money by lending out your funds for interest while it sits in their control. The system is based on the assumption of trust that you believe that the bank will return your money when you need it and that not everyone will want their money at the same time. The degree that the banks trust that there will not be a rush for everyone to want their money at once (after all, its already been lent to someone else!) is expressed by the amount of money that is held in reserve by the bank---money that is on hand to give back to depositors on demand and to fund transactions. The amount the government requires the banks to hold in reserve is ridiculously small--$41 billion dollars for the entire US. That equates to roughly ½ of 1 percent of all money on deposit or roughly 137 dollars for each man, woman and child in the country.

Banks now, however, are not content with making money from the interest generated by reletting your savings. They have created investment vehicles such as mortgages, credit cards, auto loans and all of the finance products that we are used to enjoying. How big is this additional debt?

· Credit card debt = 2.5 Trillion dollars—roughly $8000 per household
· 43% of American households spent more than they brought in last year
· The average household owes over $18,000 on various types of debt not counting mortgages

This would be horrifying enough but banks in the US have further leveraged their “assets” into something called derivatives. These “bets” exceed 165 Trillion dollars for US banks alone (over 700 Trillion held worldwide). That is more than 3 times the value of everything produced by every person on the planet for an entire year. All guaranteed by $41 billion in reserves.

As the banking system began to realize defaults in the subprime and Alt-A mortgages the entire system began to shake. Losses were in the hundreds of billions of dollars. Companies were decrying the fact that credit markets had “seized up”—the value of assets were falling faster than the reserves could keep up. As of April 8, 2008 the amount of reserves held by the banking system in the US was negative. Banks were, in essence, insolvent. Bear Stearns was the first to openly seen in default. Investors were running for the exits, driving down the value of what few assets were shown on the books. Bankruptcy was imminent.

What wasn’t known by most of the public was the amount of derivatives that were held by Bear Stearns off balance sheet (level 3 assets, derivatives, are not required to be reported on accounting statements. That is changing, however). Bear had exposure to 15 trillion or so in derivatives. If Bear failed, that threatened to collapse the worldwide derivatives market and plunge the world into a dramatic global economic collapse not seen since the depression.

The Federal reserve stepped up to try to salvage the situation. JP Morgan Chase, incidentally the largest shareholder of the New York Federal Reserve Bank (yes, the Fed is not a government agency, it is a privately held company), was given the lone opportunity to acquire Bear for $2 per share---Tens of trillions of dollars of assets for less than the cost of Alex Rodriguez’ baseball contract with the Yankees.

They also opened the discount window to flood the market with cash. Banks lined up to borrow tens of billions of dollars every day to fund the writeoffs in the collapsing mortgage market. As of April, banks had borrowed over $150 billion dollars just to meet the $41 billion dollar reserve requirement.

Now you are being told that we are near a bottom in the housing collapse (we are not even halfway yet. To return to historical values homes will need to come down another 30-40 percent). The money the Fed is pumping into the banking sector has caused dramatic inflationary pressures as the dollar is driven to new lows. Food is skyrocketing as is fuel and base necessities. The consumer is being squeezed relentlessly.

Then comes the second shoe. All of the suburbs that were built up, planned and developed from the housing boom had another component. Commercial real estate. Strip malls. Movie theaters. Pizza places. Dry cleaners. Services for all of the McMansions. As those homes go unsold and lie vacant—as the consumer gets squeezed and must reach to afford basic supplies—these businesses will go bankrupt. Strip malls that were planned to unoccupied. Unable to afford the payments to the banks without tenants management companies go under. Commercial real estate collapses just like its residential brother.

Close behind lies 2.5 trillion in credit card debt—most of which is funded at 20+ percent interest. Consumers will choose to buy groceries and to forget their credit cards. Trillions more in assets collapse—the Fed injects liquidity to maintain trust in the economic system---the dollar falls further---inflation picks up and squeezes the consumer even more.

But this still is just the beginning.

[HSmomto4]

Welcome to the problem. The banks are getting the low rates, borrowing money for themselves, but not passing the low rates or money down to the little man. Our economy is basically frozen because the banks aren't lending any money out.

[Rondaben]

Welcome to the problem. The banks are getting the low rates, borrowing money for themselves, but not passing the low rates or money down to the little man. Our economy is basically frozen because the banks aren't lending any money out.

Basically, they don't have any money to lend out. The Fed requires that they maintain a very minimal reserve amount. They are losing money at a breathtaking rate on their existing outstanding subprime, alt-a, commercial and derivative loans. The money they are borrowing is being used to offset these losses and is therefore not available to be lent out.

To put it a different way, they are hemorrhaging as fast as the fed can pump blood into them.

[cbressler1976]

We just bought a house a couple of months ago....the house normal goes for almost 400,000..... we got it for 280,000.... our interest rate is 6.275... I thought we had a great deal.... I prayed and prayed to God for help.... He helped us out way more then I could have imagined.... but we didn't have a house to sell....so it probably was easier for us...

[Jubilee21]

Basically, they don't have any money to lend out. The Fed requires that they maintain a very minimal reserve amount. They are losing money at a breathtaking rate on their existing outstanding subprime, alt-a, commercial and derivative loans. The money they are borrowing is being used to offset these losses and is therefore not available to be lent out.

To put it a different way, they are hemorrhaging as fast as the fed can pump blood into them.


Very good analysis and accurate presentation of the problem:thumb

[jds6958]

To put it a different way, they are hemorrhaging as fast as the fed can pump blood into them.


LOL, true

[lovinlife4]

Well this does help and yes selling and buying hurts. We have a great home in a quiet little neighborhood where everyone waves, keeps their yards tidy and the average home sells for $179,900. Usually they sell within 90 days but 11 houses in our vicinity have been sitting for a year+! We aren't in a huge rush, just in need of something bigger but we'll make it work. I just wish people that make all the calls that affect the average joe would see that we need help!!! Cut the mortagage rate and get some of these homes moving. People are foreclosing because banks aren't allowing for good refinacing. It's a vicious circle isn't it:(