I’ve written about this a couple of times this year, but this morning CNN published an article with one more reason that listings are lower than they should be, and it seems worth adding to the stack.
From 2011 to 2013 millions of families either bought or refinanced their homes with record-low interest rates. We’ve already discussed that many of these families – who would likely be organically ready to move up, down, out or on in “normal” cycles, are choosing to stay in their homes because their housing payment is so darn low.
However, time moves inexorably; life happens, and changes happen in people’s lives that trigger the question: “Is it time to move (up, down, out or on?)” While some families will resist the urge to make changes, certainly some of them will find the reasons to move on too compelling, and will choose to sell their home and buy the next one. Right?
In today’s article the author explores how many families are choosing to buy a new home but keep the old one and rent it out, since rents are rising and their mortgage payments are so low. It makes sense, and anecdotally I’ve had clients explore, and sometimes choose this option.
However – there are consequences to this. First, it means that homes that might otherwise be listed are instead being held off the market. This exacerbates the problem we have with too few listings across the country. Second – and you may have to follow me on this one – it means that the ultimate owners of these mortgages (primarily Fannie Mae and Freddie Mac) will at some point see the market value of their holdings decimated.
Why is this? Because when interest rates rise, the value of an already-existing fixed-rate mortgage crashes. (The income stream is defined and fixed, so the purchaser of that income stream, if they need to earn a higher yield, has to pay less for the right to collect those payments – the mortgage.)
Since there are millions of mortgages at extraordinarily low interest rates, there are potentially billions (maybe even trillions) of dollars of mortgages that may simply not pay off until they are fully amortized, 15, 20 or 30 years from now.
I’m speculating, right? This has never happened before. Right?
Well, except in the early 1980s, when banks (who held on to more mortgages then and didn’t sell them all the Fannie / Freddie) suddenly found themselves with billions of dollars of mortgages lent out at 5% when the then-current rate was in the mid-to-high teens. (Yes, a good mortgage rate at the time was 12% to 13% – score!)
Many of these banks had to be bailed out, because when they took a paper loss to recognize the declining value of their mortgages (even though the borrowers were still paying on time) they were not sufficiently capitalized and the banks were, on paper, bankrupt.
Rant over – sort of.
We’ve created the same darn situation today. This time it’s not banks – it’s Fannie / Freddie who will appear to be bankrupt in four or five years, even though the vast majority of their loans are performing and they are throwing off billions of dollars in profits to the U.S Government every quarter. The agencies will then be used as a political football again, essentially for providing high-quality, inexpensive mortgage for American families while making a profit for taxpayers.
Sorry, rant wasn’t over.
There is no “fix” to this issue. We can’t force folks to sell their homes or refinance out of their 3% mortgages. But a few years from now when the politicians start using Fannie / Freddie as a political football again, remember they were only making good loans at good rates.
And, back to the original point – maybe it will be a while before listings catch up with demand.
Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (on Amazon)
Mortgage Advisor, C2 Financial Corp
(408) 348-3442 / firstname.lastname@example.org / http://www.loanguide.com
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