A Conundrum

Bank of America and Citicorp reported profits. Bank of America said, “Non interest income included $2.2 billion in gains related to mark-to-market adjustments on certain Merrill Lynch structured notes as a result of credit spreads widening.” The translation—The market is more doubtful of our ability to pay our loan. Therefore the loan has decreased in value. Voila, we can report profits on that decrease in value.

So, how about the homeowners? It’s more doubtful that they’ll be able to pay off their loan. Do you think the bank will decrease the value of the loan? “What’s sauce for the goose is sauce for the gander.”

Home Values

Alexander Hamilton started the U. S. Treasury with nothing—and that was the closest our country has ever been to being even. –Will Rogers

Bond-holders know that when interest rates go down, the value of an 8% bond or mortgage goes up. If a mortgage could not be prepaid (it can), then the “value” of an 8% 30 year, $100,000 mortgage is--

Rate ---Value
4.5%----$144k
6%------$122k
7%..........$110k
8%------$100k

The fact that mortgages can be prepaid, means that the value of an 8% mortgage is not 144% in a 4.5% market. But it is above par.

If the value of the mortgage goes up, doesn’t the value of the home have to go up also? That's what Sinatra thought, "You can't have one without the other."

Today many home-owners are under-water—the mortgage is bigger than the value of the home. If the home-owner gets a lower interest rate on his home is he recapturing some of that lost value?

Cleaning "Toxic" Mortgage loans

Everyone--Alt A, Sub-prime, conventional, jumbo, FHA, VA--should get lower interest rates. Not just those who go through the rigor of a refinance.

How? Lenders send a notice to borrowers--"Your interest rate has been changed to ___ and your new payment is ____."

When? By July 4th.

The result-

• The borrower can more easily make his monthly payment--making the loan more secure for the lender.
• The borrower has extra money to spend--boosting the economy.
• The investor has a more secure, more valuable loan--improving its balance sheet.

But some borrowers may not qualify? The answer--the lender already made the loan, so qualification as a new borrower does not apply. The lender and borrower are already married. Dropping the rate merely makes the borrower closer to qualifying. If the rate stays high, then the borrower is worse off, and for the lender, the loan is more risky.

Older Borrowers

What doth the Lord require of the but to do justly-Micah

This is from the Wall Street Journal Older Borrowers, Out in the Cold By ELLEN E. SCHULTZhttp://online.wsj.com/article/SB123967085817315655.html

Welcome

The Captains would come into port.
They would go to the point, while the sailors would go to Cove Street.

Welcome to Cove Street.