CHESSNOID

The market made a remarkable comeback today. The federal reserve gave a nod to the housing market by cutting interest rates. The investors all jumped on the bandwagon and started buying like everything was on sale. Of course, I jumped out of the market too early. I am happy with my gains and the stress is gone. Timing the top is always hard.

Now, do the investors really have reason to buy now. I would make an argument that they are buying into a bull market trap. The economy has been doing well, but there are too many things to bring it down. Trying to understand what the federal reserve is trying to do is difficult. The problem right now with housing is the number of subprime loans is not that they are adjustable rate loans. That is only a small part of it. The biggest part of the problems is that these particular loans had teaser rates that have now adjusted to market rates in a fully amortized loan. The two aspects of the problem compound the reason why an owner would go into foreclosure.

The first part is the the teaser rate that they qualified for the payments. Now that the loan is adjusted rate wise, most owners truly can’t afford the payment. That is the reason why they bought with this type of loan in the first place. The current rates are still extremely low if you look at history. The size of the loan taken out makes the problem of the rate adjusting exaggerated. When you are talking about a $100,000 -$200,000 loan, the monthly payment seems manageable. When the loan is a jumbo loan at $500,000-$1,000,0000 or more, the loan payments just become tsunami payments ready to submit anyone’s budget into submission. Again, if you could have bought with a standard 30 year conventional loan, you wouldn’t of opted for this choice.

The second part of the problem is that when the loan resets after the teaser period, the loan becomes fully amortized based on 28 years which will add back in any interest that wasn’t paid during the first 2 years due to negative amortization. So this basically compounds the normal market rates that are now applied to the loan.

Of course some people will be helped by the rate adjustments, such as owners with just normal adjustable rate loans or owners who want to refinance at a lower rate and have the equity available to do so. I am sure there are some out there who have waited till now.

The federal reserve and government need to actually formulate a better plan to get out of the housing debacle that has come and is just about to get started. If you read Dr Housing Bubble and other similar blogs you will gain insight on the true nature of this monster problem.