Sep182015

Interest-only mortgages define the Ponzi limit

Interest-only mortgages rest on the border between Ponzi borrowing and safe borrowing, a purgatory on the edge of the abyss of insolvency.

borrower_oblivionDebts are supposed to be paid off. People forget that simple fact and take on debt as if it is something to be endlessly serviced. Those that embrace the debt-service mentality dance on the edge of the abyss of insolvency.

When the amount a borrower pays toward principal on debt is matched by taking on new debt, a borrower is merely treading water. When the amount of new debt exceeds the amount debt paid down, particularly if debt was used to pay debt, the borrower is Ponzi borrowing. There is a point beyond which a borrower cannot pay down debts without continued borrowing, a point where the debt service exceeds the ability to income to support it, a point known as insolvency. The brink of insolvency is the Ponzi limit.

Unfortunately, the Ponzi limit is fluid, and many borrowers drift across the Ponzi limit without knowing it. Lenders often extend credit to borrowers beyond the borrower’s ability to service it, putting the sum of all credit lines beyond the Ponzi limit. Once borrowers cross this unseen threshold, lenders begin to raise the borrower’s interest rates and force them to Ponzi borrow in order to make ends meet. At that point, the borrower is insolvent, but ongoing Ponzi borrowing can mask that for a time.ponzi_borg

Once borrowers go Ponzi, all hope is lost — they can’t earn and pay their way out of debt, and obviously they can’t borrow their way out of debt either. It’s only a matter of time before insolvency leads to delinquency and forgiveness of debt, usually through a bankruptcy.

The problem with the Great Recession was insolvency; lenders underwrote too many loans for too much money. Borrowers everywhere were insolvent, and the main mechanism for curing real estate debt insolvency — foreclosure — was shunned by our government, lenders and borrowers alike; thus our government encouraged can-kicking loan modification programs, and lenders allowed delinquent borrowers to squat. These are not solutions to the problem; these are avoidance mechanisms to prevent dealing with the problem. Ultimately, the debt must be purged.

Legislators in the United States learned this lesson from the collapse of the housing bubble, and they passed the Dodd-Frank financial reform that effectively banned interest-only and negative amortization mortgages, the latter being an obvious Ponzi loan. The interest-only mortgage is perched on the edge of the abyss, and other countries moved slower to ban these loans for fear of what it would do to house prices. As a result, both the UK and Sweden are in a precarious position, and legislators don’t know what to do to avoid disaster.

Research suggest a million UK home owners heading for an interest only mortgage time bomb

Monday, 07 September 2015honorable_borrowers

Around a million home owners in the UK could end up seeing their home repossessed if they have no way of paying off their interest only mortgages, new research has found.It is estimated that some 934,000 people have interest only mortgages and do not have a plan on how to pay it off when their term ends, according to the research by consumer charity Citizens Advice.

Time is running out for some people who will either have to sell their homes, find the capital to pay off the debt or could risk having the property repossessed, the Yougov poll found.

Some of the people who came to the consumer champion said they were not made aware that they would need to repay the capital at the end of their term. The average shortfall was previously estimated to be £71,000.

Some people don’t know they have to repay the debt. It’s an act of willful ignorance, but it was quite common in the United States during the bubble. People believed the house would pay off the debt out of rising home prices, so all they had to accomplish as borrowers was to service the debt while they lived in the house; thus we have interest-only mortgages. It’s both irrational and understandable.

Overall there are around 3.3 million mortgage holders who have interest only products of which 1.7 million have no linked repayment vehicle, such as an endowment or ISA and 934,000 of these have no plan for repayment and 432,727 of these people have not even thought about how they will repay the capital.

Rules were tightened in 2012 to ensure interest only mortgages were no longer available without a repayment plan, which has resulted in a major drop in the number of products sold. …

pay_our_debtsSuccess! We go a little farther here with our ability-to-repay rules, but the intent is the same: force borrowers and lenders to step back from the Ponzi Limit.

Great Britain is not the only country facing problems with these borderline toxic mortgages.

Sweden to Cool Housing Market with Mandatory Mortgage Plan

Posted by Staff Reporter ([email protected]) on Sep 06, 2015

The coalition government of Sweden reached an agreement on a proposal that would require homeowners to pay off principal amount on new mortgages. According to a recent report from Reuters, the goal is to cool off the already overheating Swedish housing market.

Recent Swedish survey showed that about 70 percent of the country’s home owners have interest only mortgages in place. Under this scheme, they are not required to pay off any amount of the principal of the loan obtained.

What do you think will happen to Sweden’s home prices when mortgage rates go up?

Ponzi_wineAt least here in the US, we have quickly amortizing loans due to the low rates (equity builds faster at 4% rates than 8% rates). Since borrowers are paying down mortgages quicker, if prices must come down due to rising rates, owners have some ability to absorb the pain. In Sweden no such buffer exists.

Also, the loan-to-disposable income ratio of the country is at 170 percent, amongst the highest in Europe. This has raised red flags with economists, urging the government to take steps in controlling loans and borrowings to prevent any further issues down the road.

The whole country has gone Ponzi.

Under the forged agreement, a new mandate would be provided the Swedish Financial Supervisory Authority (FSA) to require property owners to pay the principal on their new mortgages. This though would exclude newly constructed homes, would be enforced by May 1, 2016. …

He added that there would be exemptions, saying, “To reduce the possible impact on residential construction, exceptions should apply, for example, when purchasing newly built homes. Exemptions should also be granted in certain special circumstances such as unemployment, illness, divorce or bereavement.”

Why are these loopholes necessary? Only to preserve artificially high home prices and provide subsidies to homebuilders. Their pandering government is as corrupt as ours.

you_will_serve_me

Borrowers bow down before their lenders. Borrowers give up control of their own lives when they take on debt as their time and effort go toward paying for the past rather than investing for the future. Borrowing is a weakness, a crushing weight, a debilitating pile of paper detailing a life of servitude in exchange for a borrower’s entitlements.

Of course, most borrowers don’t see it that way. They feel powerful. Borrowers believe they are rich because someone was willing to loan them money. The more money people borrow, the stronger they feel and the weaker they get. Ponzi Schemes of debt are the highest form of borrower sophistication and financial management. These structures take borrowers to the heights of borrower power and the depths of borrower weakness.

Interest-only mortgages have no place in housing finance. They exist on the border between solvency and the life of Ponzi, and they should be banned everywhere.

debt_production

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