Home loans refinancing

Refinancing a home loan has become increasingly difficult of late, for a number of interconnected reasons, not least of which is the fact that the banks do not actually have any money. The several trillion dollars pumped into the banking system by the US government seems to have mysteriously disappeared down a black hole in Dubai.

Despite what your politicians may be telling you,  the money pumped in was not to provide loans to homeowners in need, it was to prevent the financial system from collapsing completely and much of it has vanished in the form of kick-backs, commissions paid and staggering bonus and pension payments to bank CEOs.

The dribble-down effect of these vanishing monies will take years to have an effect further down the food chain, so do not expect things to improve overnight. Best case scenario – you are going to need at least 25% equity in your home to refinance a loan against it and with home prices in the US down to 2003 levels already, there are not many people who need refinancing with this much equity so that means finding cash. Yes – cash – there does not seem to be a lot of that around unless you are a merchant banker, but anyone who wishes to refinance a home loan is going to need some.

The big issue at the moment is the amount of people who were persuaded to accept adjustable rate mortgages (ARMS) on the understanding that in the beginning there would be a low introductory interest rate and later in the loan’s life, the rate would rise. At which time, the various banks, salesmen and mortgage “advisors” assured them, they would be able to re-finance using another adjustable rate mortgage. Oops. Hello financial crisis – goodbye remortgaging in this way. 

We are now faced with a situation whereby one in eight mortgage holders in the US are delinquent on their mortgage payments and the amount of foreclosed homes is staggering. Although the governments Inc (and this issue is by no means exclusive to the USA) are quite happy to socialize the banking losses, they do not appear quite so keen to socialize the assets and there are vast numbers of government or bank-owned homes sitting around rotting all over the world. In Spain, for example, the banks have now become the largest property owners in the country. Untold thousands of homes have been seized and are being held back from the market in an attempt to prevent house prices from collapsing completely. With official government figures showing unemployment in Spain at 17.4% it is difficult to gauge what the long term effects will be, but the European Central Bank printed 60 billion euros of new money and pumped it into Spain a few months ago – and this was not reported by any major European news sources.

Which brings us back to the issues facing people in need of refinancing with bad credit who are also facing the prospect of losing a home to foreclosure. The mortgage rates for refinancing for those in this situation will be even worse than those with acceptable credit ratings. Posting the keys to the property back to the mortgage company, finding rented accommodation somewhere and simply walking away is becoming a solution many are taking. This is not without it’s problems, and if I know one thing it is that a bank will never walk away from an uncollected debt. The recent government initiates to help consumers in this situation are at best mis-guided and at worst, a deliberate attempt on the part of the government to persuade you there is help available when there is not.

Realistically, if you are in this position – you are on your own and the only two options are to either walk or find the money to pay. There are no easy options here at the moment and I am firmly of the opinion that we will be returning to more rational lending practices for the foreseeable future. The housing bubble which was created to lessen the effects of the dot com bubble must be allowed to deflate and the inflationary bubble the governments are producing by printing extra money and allowing the banking institutions to revalue their assets is not going to work.  Economist LudwigVon Mises said it best: “There is no escape from a credit induced bubble.”

Unfortunately, the government interference means the bubble is not deflating evenly and some parts of the economy are being artificially prevented from correcting – the big fear as far as I am concerned is the creation of a “government bubble,” where all the housing stock, all the jobs and all the production are government owned. We already have governments basically running or owning the banks, the insurance companies, the car makers and much of the housing stock thus eventually property developers. There really will be no escape from the government bubble that does not involve bloodshed or at worst an Orwellian 1984 situation.