The Case For Refinancing (For The Banks Too)

It would be great if the housing market could find a spark. What is out there that can move the market?

Time To Release The Refinancing Hounds

Could refinancing be the spark needed to get the housing market and the general economy moving again? The case for this has to be made. Here are some reasons why in the medium to long term, it should help everyone involved in the cycle:

-          Homeowners – There are many homeowners that have proven their worth by still paying on mortgages.

-          Businesses – Everything connected to housing would benefit from this type of move. Builders would see more activity. Local governments could start seeing higher tax revenue. Families could start living in their own homes.   

-          Banks – Most homeowners have shown that even though they will not be able to refinance their loans, they have not walked out on them.  The ones that couldn’t are already out of the system. The banks should take advantage of this loyalty. The amount of money received right away from the fees will at this point outweigh the loss of revenue over the next 25 years. Some banks that are not as tied to trading for profits as others could use this to boost current period revenue.

The How To Plan

-          First, target all homeowners that are consistent with their payments and are within a certain percentage (maybe 2-5) of the current requirements for refinancing.

-          Offer them a standard refi program with a penalty fee worth the thirty year Net Present Value of the reduced value of the home. 

-          Another option is to attach an annual fee to the mortgage if the Net Present Value of the reduced value is too high.   

trouble brewing ahead

I have been keeping up with recent news and feel out of whack with what is going on in the economy. I see the stock market is moving up but don't feel confident in why the market is up while the economy slows. I have a few reasons



1) The fed is trying to cover up the foreclosure disaster by lowering interest rates. In the meantime, commodity prices are flying through the roof and the dollar is getting its butt kicked like its an opponent of the New England Patriots. Ultimately, this action will create longer lasting economic problems for the US. I don't see a problem with the rise in foreclosures. People who bought houses without even reading what the adjusted interest rate would be were stupid and deserve some short term pain. Let them go back to renting.



2) The price of oil is skyrocketing. And there is no end in sight. The instability in the middle east is growing. Iraq cannot govern itself, Iran continues on its nuclear mission, and Turkey has joined in the mess with their squabbling with the Kurds. I feel that this is just the tip of the iceberg as Russia and China will become more involved. A barrell of oil currently costs over 90 dollars a barrell. The silver lining in this issue is that research and development into other sources of energy have also skyrocketed.



3) A larger percentage of the GDP is covering health care costs. To be fair, more Americans are living longer. But that is inconsequential to other issues like prescription drug legislation or the profiteering of HMO's and insurance companies on the health of Americans. Unless we find a way to curb these costs, they will impact our work productivity in the long term.

Interest Rates

Hey

I wonder if leaving the interest rates alone has something to do with the nation's high percentage of ARM mortgage holders? With all the news with the subprime market correction, you had to have a feeling that Mr. Bernanke would understand what adding a quarter point would do to the mortgage holders that are on the brink. You can look at parts of his speech at www.marketwatch.com.

The amazing thing is that interest rates are really low. There is also a ton of vacant housing still on the market. This market still has a ways to move down before the problem is corrected.

I have a feeling that other factors (underemployment, credit card debt, inflation, etc.) will tip this over the edge. I am looking at my Pepsi raising prices due to commodity price increases and am wondering when inflation and the housing problems will collide and cause the Fed some real problems related to interest rates. Maybe that time is now.


The Wikiwealth portfolio consists of the following:

Pepsi Stock(www.pepsi.com)
March 55 Call for Electronic Arts (www.ea.com)
Sharebuilder Money Market (www.sharebuilder.com)
Have any ideas, questions, comments, web sites or different blogs to look at? Email at keanemd@gmail.com.

Take care and happy investing!