Refinancing and Remortgaging

Whether or not anyone in power is prepared to admit to it, the refinancing and remortgaging landscape has changed drastically since the onset of the financial crisis. Lack of available credit still dominates despite massive injections of new capital from the world governments. The US, UK and European central banks have been printing money hand over fist for some time now, yet still, credit is tight. In the UK, part-nationalized Lloyds bank announced yet another loss - £4 billion this time as bad debts continue to increase. This comes as no surprise to anyone with a brain, and the taxpayer will have to absorb much of this.

The governments continue to push the idea that they are doing all they can to increase lending, when in fact, they are doing precisely the opposite. What their intention is with all this money printing and bond purchasing is to prevent the system from collapsing and continue to deceive the public as to the size of the losses suffered through the crash. Not increase the amount of money available for lending. The problem and size of the losses far outweighs what is being admitted to. Firstly, it is necessary to look at the state of the housing market to determine why refinancing is both expensive and difficult to find.

In the USA, Bank of America, Wells Fargo, JP Morgan and Citigroup are now the biggest property owners in the country. What are they doing with that property? As instructed by the government Inc, and no doubt as part of their various bailout deals – they are sitting on most of it and preventing the real estate market from correcting properly. My feeling is that this is a mistake and will merely serve to draw out the correction – possibly causing a decades-long problem. This of course matters not one whit to any political party because they can only see as far as the next election. But it is almost impossible to realistically value any property at the moment.

Exactly the same thing is happening across Europe and the UK – The Spanish banks are also the biggest property owners in that country and there are around 2 million empty properties – most of which are sat on banks balance sheets at an inflated value. The problem has become so large that the European central bank was forced to inject 60 billion Euros into the Spanish covered bonds market recently. Did this event cause a reaction in the media? Strangely enough the event went almost un-noticed by the mainstream media and you would think that creating 60 billion Euros out of thin air might have had some sort of reaction. Apparently not.

As usual, the media is full of bullshit press releases and headlines such as “strong price increase in housing market shows the worst is over.” Quite honestly, I am sick and tired of hearing this crap and have now come to the conclusion that if you want to find out what is going on, the last place you should look is a newspaper. The simple fact is, that as the housing market corrects, median prices tend to start rising as the only property moving is highly discounted at the upper end of the market. If none of the lower priced real estate sells, guess what? Average prices rise. Once we start getting to the point where the lower end starts moving again, average prices come crashing down. All the releases claiming housing price rises invariably either neglect to mention, or gloss over, the level of activity. Just take a gander through the historical median prices for Manhattan for example. Rising all the way through 2008 as the market collapsed – then wham! Fall off a cliff and correct along with the rest of the market. The UK market is going through this phase at the moment, and anyone who thinks the British housing market has stabilized needs their head examined. Average British home prices are still around double their historical average.

So, both the governments and the banks are well aware that housing is still overvalued, and has a long way to fall, because they are the ones holding the housing stock in reserve and artificially creating a lack of supply, or at least trying to. As much as the British Prime Minister and the American President might publicly cry foul at the banks lack of lending after the taxpayer bailed them out – this is just another line of bullshit. Which brings us to the problems of refinancing a mortgage at the moment.

We have to return to rational lending practices. We have no choice. The result of runaway lending to anyone with a pulse is apparent, and I don’t think we will be out of the woods for another 5 to 7 years. One rational lending practice is to not lend money to people who have demonstrated an inability to pay it back. No matter how unfair the credit rating systems may be, the banks will use them to determine whether or not to lend money to some one, and quite frankly, if you have bad credit, they are not going to lend to you, it is as simple as that.

Refinancing or remortgaging with poor credit ratings will be all but impossible for the next few years. If that includes you – sorry. There are ways around it, and if you are looking to buy a home with bad credit, I would suggest a couple of ways – One, approach the seller to see if they will finance it for you. This model was not unusual during previous busts because it allows the seller to sell at a higher price in a bad market, and allows the buyer to buy a home they would not otherwise be able to finance. Two – if you need to refinance – approach the original lender with a proposal. There are (admittedly rare) occasions where the lender is prepared to write off some of the debt to make payments more affordable. Unfortunately, all the time the government Inc is prepared to finance them by providing them with enough funds to sit on as many foreclosed properties as they wish, this option is rarely available. But – it never hurts to ask.

This is another area where there is and are going to continue to be difficulties. Home equity loans are loans against the equity one holds in a piece of real estate. Let us say you have a $200,000 mortgage, and a property worth $400,000. Theoretically, you have $200,000 of equity against which to borrow. On the other hand, if it is impossible to value the property, how can anyone determine the level of equity? Exactly. I defy anyone to accurately value a property in Florida at the moment. It is worth what someone is prepared to pay for it, and I have seen bulk deals go through recently at as little as 6% of the peak prices, so what anything is worth is anyone’s guess.

So, home equity loans are suffering a similar fate to any other mortgage at the moment: the mortgage rates are through the roof, anyone with a poor credit rating is seriously out of luck and it is all-but impossible to value anything all the time the banks and government Inc are holding so much stock. No one seems able to determine how much longer this situation will persist for, and of course there are some loans being made, along with the usual array of disinformation being bandied about.

Real estate prices in the US have fallen to 2003 levels, and there is a consensus amongst the analysts with no axe to grind that the bottom of the market will be around 50% off of peak prices. Which means we are nowhere near bottom yet. Roughly the same situation exists in the United Kingdom, with an approximately 50% fall needed to bring home prices anywhere near historical affordability. Artificially low interest rates cannot continue indefinitely, and the artificial prevention of foreclosure (or repossessions as they are called in the UK) is not going to prevent this from eventually happening.

The simple fact is that the current “downturn,” is a direct result of not properly dealing with the previous three recessions. Both the 1970 and 1980s “down turns,” along with the bust of the dot.com bubble were dealt with by artificially inflating assets to use as collateral to prevent a collapse at that time. Slowly but surely we have now headed to the bubble of all bubbles, the credit bubble that created the housing bubble that created all the other bubbles (including the media bubble that is now bursting. )

The similarity between this bust and the depression of the 1930s is actually very strong. Being somewhat of a history buff, I see many similarities, not least of which is the extent of the downturn. This graph rather aptly demonstrates this. Produced by the National Institute for Economic and Social Research in the UK, it is clear we are tracking the 1930s depression in the UK pretty closely.

The x axis shows the numbers of months off from peak GDP; the y axis represents where the economy is at that point in relation to peak. Almost exactly where we were in 1931, meaning at least another 2 years of downturn before a recovery. As can be seen, the previous 2 busts 1979-1983,, and 1990-1993 both followed a similar pattern, but were less severe. We are now paying the price for those. Not a single British bank collapse during the great depression, and several have done so this time around.

The great unspoken fear is that we are creating a government bubble in an effort to deal with this one. Just exactly what percentage of the housing stocks can the government Inc own before it collapses? How much extra money can they print before it become worthless?  And what proportion of employment will be government Inc provided before it all falls down?