patrick.net

FAB asked:

Any idea what Ethan Penner

No, that is a good question indeed. Anyone know?

O.K that tears it! How many posters here secretly wish they were a “guitar god”?

I secretly wish I was an industrial composer & mixer, as in Einsturzende Neubauten fame.

Thanks, DS. This was the kicker for me:

...The extent to which borrowers can repay their loan more quickly usually depends to a far greater extent on their capacity to make additional repayments, rather than through offset savings. Generally, borrowers who cannot afford to make significant additional repayments will be worse off refinancing to a line of credit, because a line of credit will usually have a higher interest rate and the higher interest charges may outweigh any offset savings.

So basically, Aussie LOCs (aka "mortgage accelerators") have greater than average fees & rates, and any significant interest savings and/or term shortening requires additional payments and that the borrower exercises a level of self discipline rarely seen today.

So basically, we're back to 1) negotiate a lower price when you buy it, and 2) either get a shorter-term (15-yr) FRM or pre-pay your 30-year?

http://www.oneaccount.com/onev3/rates/toa-rates.shtml

This is a link to the Virgin mortgage oneaccount that is in the UK - they charge no fees, except the initial ones to set the account up and the interest rate looks fairly good although it is not fixed - on the sidebar you can link to other useful information - if Virgin were to offer this in the US, the I would have no qualms about going for it. As to the UK uptake of these loans - I'll do a little more digging.

Not investment advice

I’m not convinced the cash extraction is necessarily going for mortgage payments. I know of one who is taking cash out to invest in other asset classes- call it a hedge if you like.

If you consider bills and SUV asset classes... :)

I doubt many people are confortable extracting equity to invest in non-RE assets. There are of course exceptions.

please share what you know about Chris Michael George (CMG) and what success he’s had originating the practice of “mortgage acceleration” down under?

hmmm, never ever heard of him... google doesn't bring up much... but i'm suspicious of LOCs now when a fast-talking MB shows you a spreadsheet on their laptop with 2 lines on it...

“1960’s Fender and Gibson guitars”

O.K that tears it! How many posters here secretly wish they were a “guitar god”?

i bought a left-handed Fender (copy) to learn to play like BB King or Son Seal or someone and never did... but was already over-committed with blues harp and keyboards while eyeing off my sister's sax... i've gigged with a couple of rock/blues bands tho...

HARM

I agree. That won't work in the American system. At least not without a fundamental shift in people's approach to credit risk and savings.

Your (1) is _always_ better. You are never worse off getting a lower purchase price as the buyer. That should be obvious, although the realtor machine has distorted even that in this crazy bubble.

(2) I'd say that you're better off with a 30 year if it has no pre-payment & simple interest, if you're disciplined. You basically get a free option payment baked in for a very minor rate difference. If the rates diverge more, then the 15-year will be attractive. The 15-year is good for people who don't trust themselves to make payments greater than minimum, instead blowing the money on other things.

So basically, we’re back to 1) negotiate a lower price when you buy it, and 2) either get a shorter-term (15-yr) FRM or pre-pay your 30-year?

In Oz, you can't get a FRM for 15 or 30 years at all, only about 5 years max, after which they review the rate. So it's like a slow-motion ARM... I guess that works in the banks' interests, particularly in a time of climbing rates... and FRMs generally have a higher interest rate than ARMs, but that's probably ubiquitous...

I'm actually investigating to see if there is such a thing as an option ARM here, nobody really talks about them -- I can actually see a good use for this type of loan in the case of small-scale development -- vs some sort of commercial loan...

goober,

My 1959 Vox "Meteor" has a pre-CBS (Columbia Broadcasting Systems bought out Fender in the mid-60's) vintage pick-up cobbled in there. This is a 3/4 scale guitar so it looks like a child's instrument but is great for slide guitar. Some of my friends say I'm not half bad at "slide". Course they're usually pretty bombed when they say that.

FAB

I'd maybe check out the "hedge" (I use the term loosely here) funds that are crawling all over the music and movie industries right now. I'd be surprised if he isn't sitting on a HF or two as a door opener.

Also I look for there to be a lot of really bad music and movies (even worse than today's garbage) coming out between now and the eventual Hedge Fund bubble pop.

Peter,

She is invested heavily in income property, so is diversifying.

With the scale of extraction so great, are SUV sales correspondingly high?

to all:

are US LOC mortgages charged at the same interest rate as ordinary ARMS? and what is the current interest rate differential between ARMs and FRMs?

http://www.cml.org.uk/cml/statistics

Council of mortgage lenders - lots of statistics that I seem to be able to access okay - looks like 60-70% of all mortgages are fixed.

I think the UK is not nearly as much in Bubble Trouble as the US is.

She is invested heavily in income property, so is diversifying.

See, people who extract equity usually have high confidence in some form of real estate investment.

Oh the mortgage accelerator, you mean just making an extra payment each year or adding a little bit extra to the monthly payment? Love it, charging for something that you can do for free. Puuuuuurfect.

surfer's got it worked out ;)

the other para read (ASIC's emphasis):

"A line of credit may also allow borrowers to make the bulk of their purchases or payments through a credit card with an interest-free period. This means that the borrower’s salary can sit in their loan account in the period between the date of purchase and the date of payment of the credit card. This mechanism slightly reduces the balance of the home loan debt for part of each month and therefore slightly reduces the interest payable. These types of savings are called offset savings. The credit card will be paid off each month by using your funds from the line of credit. The offset savings achieved for most people will be minimal."

Sean, that sounds like a margin account more than it does a credit line.

Sean, that sounds like a margin account more than it does a credit line.

there might be variations in loan designs and designations across countries, which can be a trap in analysis. follow the earlier links i pasted in to determine if it is the same as a US LOC. (i always thought a margin account was an account offered by brokerages that allows investors to borrow money to buy securities, simple as that.) the pattern of LOCs here is that they always issue a credit card which you're supposed to live off (and pay off the CC from the home loan periodically, thus maximising the 'work' your direct deposited salary is doing on the home loan), or else you siphon some of your salary into a standard savings account to avoid the credit card trap and pay your bills that way. the latter method is probably preferable, otw you're constantly on edge about the 55 day period and requires budgeting many people are not capable of.

Sorry I'm late to the Randy/Allah debate, but I can't resist adding my thoughts. I think a concrete example may elucidate things.

Randy made a comment, which should have been relatively non-controversial, that paying down a mortgage is a form of savings. For instance, suppose Owner A has a house with an appraised value of $500K and a mortgage balance of $400K. He inherits $100K. He could pay down one fourth of his mortgage, in which case his "savings" will be the interest that he no longer has to pay on that portion of his mortgage. Alternatively, he could buy CDs, in which case his savings will be the interest on the CD. Or he could use the money as a down payment on a Miami condo. Or, he could use the money to make an unsecured loan to his unemployed brother in law, who promises to pay back the loan "with interest" as soon as he gets back on his feet. All of these options are forms of "savings" with a greater or lesser degree of principal risk.

If he pays down his mortgage, then the value of his house drops to $300K, then he has lost all of his principal. But this just means that there is no guarantee that he will receive a return of his principal when he sells the house. I think that this scenario, or the Miami condo scenario, is probably what Allah had in mind when discussing the riskiness of real estate equity as a form of savings. But just because it is risky doesn't mean it isn't savings--even the loan to the brother in law is a form of savings--albeit with a high degree of principal risk.

No form of savings gives you a guaranteed return of principal. Even if you buy CDs, the government could accuse you of being a drug dealer or a terrorist and seize your account. Or you could get in a car accident and get sued. Or, FDIC notwithstanding, the bank could fail and the government could fail to stand behind FDIC. (Ask a depression era survivor of bank savings are riskless.) Not to mention (as others have) that even if your principal remains intact, inflation could eat away at your purchasing power.

are US LOC mortgages charged at the same interest rate as ordinary ARMS? and what is the current interest rate differential between ARMs and FRMs?

virtual chris' little movie shows that the interest rate is higher on the LOC than an ARM, thus wiping out much of the saving. the other features are the same as Oz -- direct deposit to home loan, interest calculated daily, etc. you can draw down from the sum (line of credit) thru either debit or credit mechanisms, i believe, depending on the loan. note the ASIC warning that the online calculators are sometimes deliberately misleading because they don't include the higher interest rate when comparing LOC to ARM.

Oops... I should have said "Ask a depression era survivor if bank savings are riskless."

Back then, the dollar was on the gold standard, today it is not and money can be quickly printed up.

True, but whether the government allows the bank to default on depositors or just runs the printing presses the effect is the same--your purchasing power is gone.

This is a pretty good article explaining the CMG Home Ownership Accelerator product:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/05/26/BUG95CULR51.DTL&hw=mortgage+line+of+credit+australia&sn=002&sc=758

Here is an excerpt from another article that discussed the CMG product and then a DIY home ownship accelerator. Ahh for the days of 4% HELOCs.... BTW you must read it until the end for the real kicker.

Pam Narz, a city worker in Westminster (Orange County), is a disciplined spender and saver who used a low-interest home equity line and the grace period on her credit cards to reduce her mortgage balance by about $35,000 in the past year. She now expects to pay off the mortgage, which has 26 years left on it, in slightly more than seven years, saving $120,000 in interest charges.

"I still do the same things I've always done. I just pay for them in a different way,'' said Narz, who started using the system a little more than year ago after she bought instructions from a company called Tardus America, which sells its package of materials for $495.

Thank you all for a good thread discussion; it has given me pause to examine my own... ahem... "cash management" strategies involving a bank (no name -- but it has a stagecoach in the logo) that offers horrible interest on checking and savings accounts :-)

Same as all other assets.

Huh? This is is categorically false. People who own real assets (factory, real estates, farms) will do MUCH better than those who "own" cash.

People who are deeply in debt will be greatly awarded.

Cash is not necessarily king all the time.

FDIC insurance guarantess it will.

FDIC is a corporation. It can too go bankrupt.

Those with fixed mortgages will laugh in hyperinflation. Their money payments will equal the price of a hotdog.

And they will not have to face hyperinflating rent.

Then go out and buy some real estate and we’ll compare notes next spring.

1. There will be no hyperinflation
2. The real estate market will not crash yet by next spring (although we will see many angry homeowners beginning to panic)

Allah,

From the perspective of mental accounting, I agree with Schiff that you should not "count" home equity as savings if you are not planning to sell your house. He is right that your ability to reach this asset is subject to the whims of the market.

From a theoretical perspective, I suppose you could do some kind of NPV analysis of the present value of your house carrying costs vs. the present value of the future rent payments you will save by owning. This, I think, would yield a more accurate estimate of the value of your home. However, it is very hard to know what future rents, taxes, insurance and repair costs will be. Nevertheless, I think that for many recent buyers, such an analysis would reveal that the NPV of their house is negative even though they supposedly have equity in their homes since rents are still so low relative to home prices.

From the perspective of mental accounting, I agree with Schiff that you should not “count” home equity as savings if you are not planning to sell your house.

Then should a bank account be considered saving if you are planning to withdraw the money? Byt if you do plan to take money out, the account does not "always go up" in nominal value. :)

I think the line between equity and saving is quite blurry.

Those people, he says, would be better off paying down their principal. But like Franklin, he's not sure the new CMG mortgage is the best way to do it.

Gott says borrowers would need to make sure they don't jeopardize their federal tax deduction for mortgage interest with the new loan.

Huh?

It’s has already crashed!

We have seen nothing yet. Have you been through a real housing crash?

You better hope that it has not "crashed" yet. It is crashing though. :)

Inflation will be high, probably not 50% increase a month, but it will be high. At the same time, wage growth will be sluggish which means that when people have to pay more to buy food, they will have less to meet their monthly mortgage obligation.

In short, living standard will go down. This is a natural effect of globalization. However, having a fixed mortgage with interest rate priced at a low expectation of inflation is a very good thing with high inflation.

The only problem is falling real asset price.

Then should a bank account be considered saving if you are planning to withdraw the money? Byt if you do plan to take money out, the account does not “always go up” in nominal value.

I think the line between equity and saving is quite blurry.

Peter P,

I agree that it is a blurry line, but I think consumers should be conservative in calculating their net worth. Just as a company may value inventory on its books at the lesser of book value or market value (even though the inventory may ultimately sold for a much higher price), I think consumers should use the lower of book value (acquisition price) or market value (based on current comps/appraisals).

If Macy's buys 1000 units of perfume for $5,000, and the retail price of that perfume is $30,000, they do not assume that they will be able to sell all of the perfume at retail. They use their acquisition price to value the inventory.

Similarly, though the current comps may show that your house, which you bought for $300K, is now "worth" $500K, you should assume that you will be forced to sell it for the price you paid. (Unless you want to try to do the math to calculate the NPV, as I mentioned.)

It hasn’t hit bottom, but the market is crashed. No one is buying, sellers are still cutting, Inventories are rising fast.

eburbed will attest otherwise. People are still buying in the Bay Area, although the market is cooling fast.

I can tell you that my vision of crash has not materialized yet.

But it is in the bag. :)

Abstractions like "inflation," "deflation," and "hyperinflation" can cloud the picture.

What you should really be looking at is the expected rate of future housing appreciation vs. the cost of financing a house. If you expect housing appreciation to outpace your cost of funds, then you should buy. If, like me, you expect flat to negative nominal housing prices (and negative real housing prices), then you should not borrow money to buy a house right now.

It’s just unbelievable how people can take things to such extremes.

It is unbelievable what people can get themselve to believe. This is why we have asset bubbles.

And if you don’t believe my numbers give U-haul a call! I got the quote today (11/2).

Randy can show that such price difference does not necessarily imply the net flow of people.

This Mortgage Accelerator thing sounds great... but then i remembered this...

Anthony Hsieh, chief executive of LendingTree Loans, an Internet-based mortgage company, used a more disparaging term. "If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing."

I don't want Tony to call me a fool. :(

One thing: money matters only if the lack of it prevents you from serving your life purpose.

Ask yourself what your purpose is. Most people do not know. I do not have a clue.

eburbed will attest otherwise. People are still buying in the Bay Area, although the market is cooling fast.

People are still buying, people are still outbidding each other. Someone I know just bought and paid a couple tens of thousands over asking. (Though clearly the asking was low compared to comps.)

People are still buying, people are still outbidding each other.

Bay Area is full of engineer-types, who are usually devoid of financial sense. It is going to take a while.