How many times can you claim that what has happened is an unintended consequence before it appears that it’s actually an intended consequence? This is a question that I have been pondering and was brought to a head this week as the U.S. Treasury notes and bonds sold off dramatically. The 10- year Treasury note, which was trading early Thursday at a yield of 3.17%, sold off Thursday afternoon as one rating agency announced that the U.S. debt instruments had been lowered from a Triple A rating. Moody's came out on Friday and refuted that, stating the U.S. Treasuries were still Triple A. Nevertheless, the Federal Reserve didn't increase their buying of the Treasuries and the 10 year finished the week at a yield of 3.44%. That is an increase of over 0.25% in a little over 24 hours. What does this mean to us and why should we care?
It means that those in this world who are buying our debt want higher interest rates to act as our banker. We will have the largest deficit in the history of the country and it needs to be financed. If the buyers want higher rates, our costs go up and this can lead to inflation, which affects all of us. From a purely selfish standpoint, this can also directly affect the mortgage rates we have in this country. We now have amazing low rates which are being used to stimulate the purchases of real estate and helping the turn around this core industry needed for economic revival. Rates are artificially low because of the $1.25 trillion being used by the Federal Reserve and the Treasury to buy mortgage backed securities, but eventually the money will be spent and rates will increase.
Could the movement of the bond market last week start a reversal of our plans prematurely and have the mortgage program end before it does its intended work? In other words, could an unintended consequence finish off an intended one? It just might happen.
Perhaps this is just a "shot across the bow" to wake us up and let us know that there is an end to everything. In the meanwhile, let's look at some of the unintended consequences of the recession we faced (or are facing) and the cure which could possibly be worse than the problem. Real estate has seen prices falling for several years and, combined with the low down or no down purchases of years past, have given rise to a large number of homeowners who find their loans exceed the value of their houses in a very large way. (Writers Note: FHA offers purchases with 3.5% down and V.A. has zero down to $417,000 today.) What we do for the people in the aforementioned predicament is a consequence which has created a large debate.
The problem, in simple terms, is people without equity tend to go into foreclosure faster than those with equity. Should we ignore them and let the housing market get much weaker before it turns? Help all of those in this situation; help those who have given up and stopped making payments first and foremost? Or help those who have made the payments more than those who haven't? I will give you a big clue: common sense was not used to formulate the answer. Many believe politics played a significant part.
The answer to the prime question of helping those who are considered underwater (value of the house is less than the value of the mortgage[s]), is yes, if done responsibly. How do you do that? Reduce the payment on the mortgage to the point that the borrower can make the payment and give the borrower a year or two to "right the financial ship". After that time, the unpaid interest going forward would be tacked onto the mortgage balance. What was done?
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