Everyone in the United States (I exaggerate) refinance their homes when interest rates hit 2.25% and of course, this was a new 30-year loan that made payments lower, but longer. And they probably refi-ed so they could take more money out and enjoy life. Now interest rates have jumped to 6 %---and for some, up to 8%. Many people now find it hard to afford a home.
The banks loaned money at 2.25% long term to homeowners for
30 years. Now, the banks’ depositors want
higher interest rates. Depositors can withdraw their short-term savings and deposit
them elsewhere at a higher rate. The
problem is the banks cannot cover the spread.
Essentially, they are bankrupt. They loaned hard money at 2.25% long
term, for 30 years, and cannot afford to pay the depositors current rates. You cannot make a promise long term if the
short term makes it impossible.
The government lowered the interest rates artificially to
lower the payments on the national debt. This robbed retired savers of their retirement
interest income. Everyone refinanced, and the new problem, inflation crept in. Raising interest rates only makes it worse.
And that is where we are at.
This happened once before with the Savings and Loan collapse
of the 1990’s. Of course, no one remembers back that far. Do they? That problem was a minnow, this one is a whale.
9 comments:
A perfect storm. And then there is the Biden administration taking its jacket off and challenging everyone in the biker bar.
Hi Sack
That's funny, they would wipe him out, just throwing a bar rag at him.
How are things going on in London? My dad had a flat over there 20 years ago and was renting it out for 3,000 pounds a month. It has to be crazy now.
What is the interest rate over there for purchasing a home?
What was the rate shock you are quoting in the early 1990's with savings and loans? We know the spread now but it would be nice to know the interest rate shock that happened then.
A lot of readers like me, done have a baseline to compare today's environment to the one 30 years ago.
Of course we can look it up but that doesn't help, because to fully understand these things, you need to know the relative baseline shock the rates caused back then, relative to expectations and what was the "normal" or baseline expectation.
If you can give us some detail, it would be great.
Thanks
We are protected from some aspects of financial madness in Britain. People tend either to use variable rate mortgage loans, or to fix the rate for only two years at a time. Moreover once the rate is fixed neither side can renege on it.
On the other hand the job of banks is to borrow short and lend long which means they are potentially always vulnerable to bank runs.
We paid off our mortgage long ago so I'm out of date. I found this definition helpful:
"the Annual Percentage Rate of Charge (APRC) ... shows, as a percentage, the annual cost of a mortgage over its lifetime. It incorporates all relevant charges (including fees) that relate to the mortgage borrowing."
On a comparison website I found that APRCs for an 80% LTV (loan-to-value ratio) are around 7% p.a. It was much higher than that for us at its worst but on the other hand we did get a tax subsidy on it which was scrapped long ago.
HI Anon 11:54
What happened back then was that the Savings and Loans lent money long term when depositors were depositing for the short term. We had massive S&L bank failures. You could withdraw your money from the S&L and get a better interest rate at a bank. Thats what everyone did and the S&L's collapsed into FDIC receivership.
There wasn't an interest rate shock. Just a bank failure rate that defied expectations.
Hi dearieme
Two years ago, I refinanced our home with a 2.25% interest rate with a 25 year loan, I'll be 99 years old when I pay it off. Why, a bank, would write out a loan, to someone 76 years old boggles my mind.
I never liked variable rate mortgages. You've paid off your home and now only have the taxes and repairs to pay. That's a comfortable spot to be in. Enjoy your retirement.
"now only have the taxes and repairs to pay." Yup; we shall shortly have to pay for a new roof.
The old one must be a 100 years old so it's done pretty well.
The new government that I expect will be elected next year is almost bound to shove property tax up substantially. All those diversity advisors and censors don't pay for themselves, you know.
Hi dearieme
Living in a 100 year old house is remarkable. Can't believe that you only have to replace the roof every 100 years. I just replace the roof in my rental after 20 years.
Ancient joke: Americans think 100 years is a long time and Britons think 100 miles is a long way.
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