Something Needs to be Done – A Glimpse of the Future
In the summer of 2016, US and global economic growth rates are nowhere close to estimates. In fact, a global recession, or worse, is imminent. At home, student loan defaults are now close to 100%. The unemployment rate is climbing, as minimum wage workers finally realize that the financial pain of working or not working is identical. In Euro-land, as the weather warms up, the never-ending flotillas from Northern Africa resume swamping the Southern shores.
A black hole opens up in the world of centrally planned money
Illustration by Denis Cristo
By now, the Treasury has long given up on the idea of privatizing the agencies. Freddie and Fannie will soon be part of HUD, surviving for the sole purpose of providing affordable housing for all – whatever that is supposed to mean. Policymakers have determined that the real estate market is stalling. Desperate times require desperate measures. Something needs to be done.
After an intense pow-wow between the administration, Congressional leaders and the Federal Reserve, the Negative Mortgage Rate Program (NMRP) is born. The program is simple. Homeowners will be paid to borrow. The Federal Reserve declares that the NMRP is a brilliant extension of NIRP (negative interest rate policy), because it will benefit everyone, not just the 1%ers.
A good reason to break into song…
Cartoon by cartoon by Steve Breen
Here is how it works:
No downpayment needed. 100% financing.
No payments needed. This is the reverse of the negative amortization loans during the subprime era. In other words, it is a negative negative amortization, or neg-neg-am loan. The loan balance will decrease instead of increase.
No need for mortgage insurance since, with no payments, there can be no defaults.
No qualifying needed, hence removing the entire cumbersome loan application process.
Say you borrow $100,000 at -1% interest. Here is the math:
Your interest cost will be -$1,000 per year. In other words, your loan balance will be $99,000, if you make no payments at all.
Using a commonly accepted 30 year term, the loan balance at the end of 30 years would be around $50,000, all without the borrower having to pay a dime in mortgage expense.
In fact, instead of charging around 4% for a mortgage, reverse that to -4% interest. In 30 years, the mortgage will be totally extinguished.
Freddie and Fannie will originate these loans, package them as neg-neg-am-MBS and sell them all to the Federal Reserve. Housing recovers overnight and the Feds declare “mission accomplished.”
What can possibly go wrong? It’s free money!
Get Out the Straight Jackets
Before you call me nuts, this is actually already reality. The governments of Germany, Switzerland, Japan and others are charging savers for the privilege of lending them money. Why stop there? Let the people enjoy negative interest rates when they buy a house, or a car, or borrow for a college education. In fact, why bother with taxes. Just let the government borrow to operate. The more it borrows, the more it makes.
Germany’s 2-year note yield has been negative since the summer of 2014 – currently it is at a new low of minus 50 basis points – click to enlarge.
Watching Ms. Yellen answer questions during the “Humphrey-Hawkins” testimony the last two days was painful. It is time to put the central bankers of the world in straight jackets and throw them into the cuckoo’s nest where they belong.
Get Out the Straight Jackets – This heavy duty model might even hold Draghi!
Photo via ebay.com
Chart by: BigCharts
Chart and image captions by PT
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4 Responses to “The Negative Mortgage Rate Program (NMRP)”
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Negative mortgage rates already exist in Spain.
The yearly euribor went negative a little while back , however the monthly average of the yearly went negative today , and it is that that a half trillion euros of variable mortgages are linked to in Spain . Banks offer mortgages at euribor plus interest to borrowers , and so borrowers aren’t getting paid just yet, just lower monthly bills … if it drops low enough they will be repaying less than they borrowed though , or I suppose if they decide to pay interest only , a possible option , they would be earning :
http://www.elconfidencial.com/economia/2016-02-15/lo-improbable-ya-esta-aqui-la-media-mensual-del-euribor-se-situa-en-negativo_1151559/
Effective today, I shall refer to “it” as Off-Center Bank(ers) or
even better Crank Bank(ers).
Too many brain cells and time are being wasted or destroyed, discussing
this economic and monetary destroying, wholly man made institution.
And for those Fed-o-philes, please by all means, continue your instructive
debates about the valve of this agency and it’s monetary policies and hence
being so enlightened as to provide light and a sanctuary for the ignorant masses.
Although we doubt it would reach that extreme it is good to understand the parameters that monetary authority are working with . In the above example there would have to be associated laws that deny multiple applications for pure profit , so in effect property ownership would become legislated whereby application for negative rated loans would require full disclosure of assets – we are looking at a fully statist distribution of wealth according to dictat with little room for any incentive to enterprise except gaming the system , or for socio-paths the acquisition of political position .
I don’t think we are even able to imagine a lite version properly , where society’s values are erased as the population plug into the new norm . In that case , leverage will be maintained , maybe reduced to token , and yet still carrying some recognition of superiority or worth or submission to the issuer … just enough to displace the old set of values while being able to deny the structure has fundamentally changed . Maybe after that it will be the ‘most loyal’ that finally take the position of social attributors , as per your example , for the last token of generosity would be to remove monetary obligation, while simultaneously stepping into the ideal of direct rule for ‘to the fairness of all’ . Who could say or prove better of that than those who removed the chain of payment and replaced it with direct access by decree . Unfortunately as a principle that approach does not work , for we cannot decree a field bear harvest , nor that people produce without using coercion – who will listen when they are already well off , and when they find they are no longer so they are likely to have found every motive to blame the authors, or join them in blaming others . We know what that produces of mankind . When you take away the concept of the worth of trade and the pursuit of an end by that means , then there is only theft left to recompense what is lacking .