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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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Thirty-Year Mortgages = Mortgage Rape?

(See the original commentary at BullionBullsCanada.com:  Thirty-Year Mortgages = Mortgage Rape )

As a natural “contrarian” I was forced to incorporate a “quirk” into my research going all the way back to my days in university. Not being able to find research materials which coincided with my own positions, I would read materials which supposedly supported an opposite point of view – and then explain how such research actually supported my own viewpoint.

I had another opportunity to resort to that technique this morning, as I scanned a rather absurd piece of Bloomberg propaganda. Bloomberg had managed to find an anecdotal account of a U.S. homeowner who had actually shortened the term of their mortgage. Bloomberg then proceeded to call this a “trend”, and kicked-out a laughable headline about “equity-building” by U.S. homeowners.

Meanwhile, back in the real world, nearly 30% of U.S. homeowners have “underwater mortgages” meaning that overall, U.S. homeowners have less equity in their homes than at any time in history. Bloomberg could have found a more credible topic if it had chosen to talk about “sunbathing in Antarctica”. However, as is often the case, in attempting to present a totally ridiculous scenario and market it as “fact”, it has instead disclosed one of the banksters’ “dirtiest little secrets”: the economic rape, or debt-slavery which these big-banks have created by extending the length of mortgages for countless millions of homeowners.

To illustrate this principle, I need only revert back to the anecdotal account supplied by Bloomberg. It noted that the U.S. couple which had cut in half the length of term of their mortgage from thirty years to fifteen years was only paying $250/month more on their mortgage but repaying principal twenty times as fast. This was accomplished largely due to the fact that by dramatically reducing the term of their mortgage, the couple qualified for an interest rate more than 30% lower than their previous interest rate (i.e. from 7% to 4.5%).

Now let’s once again return to the real world. In the real world, for every U.S. homeowner shortening the length of their mortgage there are ten other mortgage-holders (twenty? one hundred?) increasing the length of their mortgage. Indeed the favorite “mortgage modification” being offered by the banksters to homeowners on the verge of foreclosure is to dupe them into refinancing over a longer term.

Given that reality, let’s simply take the Bloomberg anecdote and reverse it. In going from a 15-year mortgage to a 30-year mortgage; in return for a modest savings of $250/month on the mortgage-payment, the mortgage-holder gets the “privilege” of spending an extra fifteen years doing nothing but paying interest to a banker. Again using the Bloomberg numbers, the homeowner going from the 15-year mortgage to the 30-year mortgage would only be paying 5% as much principle in the early years of that mortgage – and would likely be forced to pay an interest rate roughly 50% higher (using the Bloomberg numbers).

Given these parameters, it now becomes totally obvious that neither the banksters nor the Obama regime were ever interested in “helping homeowners” with the ongoing “mortgage-modification” farce. If there had ever been any good intentions here, the banksters would have never even offered these longer terms as supposed “help” for homeowners – since being raped economically is rarely “beneficial” to anyone. And if the banksters tried to simply stretch-out repayment terms (and call that modification “aid”) the Obama regime would have forbidden such deceptive, predatory tactics.

Along with demonstrating the “magical” benefits which occur when we reduce the compounding of interest (by reducing the term of a loan), the Bloomberg propaganda has also provided us (inadvertently) with what would have been a viable plan to “save” millions of U.S. homeowners – at little expense to either banks or government.

As the Bloomberg anecdote illustrates, once the term of a mortgage is greatly reduced it would have only required a tiny subsidy to “underwater” mortgage-holders to restore them to a solvent footing. That subsidy would be used to pay the small increase in monthly mortgage payments  for (for example) a two or three year period – enough to justify refinancing the mortgage for a shorter term (and much lower interest rate).

For those arguing that such a scheme would not (necessarily) be a “permanent fix” for these underwater mortgages, I should point out that with the current (fraudulent) “rescue plans” by the banksters and U.S. government that about 1/3 of these “fixed” mortgages are delinquent again within one year. Thus in comparison, my proposal is much, much closer to being a “permanent solution” than the made-to-fail schemes which have been hatched to date.

This argument also illustrates another consistent “principle” in the very limited “modifications” being offered to homeowners by the banksters: they rarely offer any “modification” which would actually improve (as opposed to worsen) the position of the homeowner. Indeed, for every anecdote Bloomberg could dredge up about “equity-building homeowners” I could come up with one hundred – from desperate U.S. homeowners complaining that the only “modification” offered by their bank is one that would make them less solvent rather than more so.

Because the banksters almost always refuse any “principal reduction” and are often trying to dupe homeowners into accepting longer terms for their mortgage (rather than shorter ones), it is beyond any doubt that the Wall Street banks never had any intention to help homeowners, but rather were trying to do the opposite: dupe desperate homeowners into accepting even more suicidal terms for their mortgages.

One of the wonderful advantages of using someone’s own words against them is that it is very difficult to rebut such criticism. Obviously Bloomberg can’t (out of one side of its mouth) gush about how wonderful the “math” becomes when a mortgage-holder reduces the length of a mortgage – and then deny (out of the other side of its mouth) that greatly increasing the length of a mortgage is anything other than “mortgage rape”.

Indeed, as a general principle it is a very effective strategy to deal with the relentless propaganda bombarding us by carefully noting all of the “arguments” used by these purveyors of deception – and then to simply say “gotcha” each and every time they inevitably contradict themselves.

A “short mortgage” is a “healthy mortgage”. And the corollary to that is that 30-year mortgages (or longer, as are being given in many mods) are nothing more than debt-slavery  and mortgage-rape.

There Are 7 Responses So Far. »

  1. This is the most absurd article that I have ever read. The mortgage business has a lot to be blamed for but the fact remains that if there wasn’t a demand for those mortgages than they wouldn’t have been sold. Do we blame the car dealer that sells a car to a customer that they can’t afford? No, of course not, we blame the consumer for their spending habits. Yes, we as an industry did not do enough to protect the consumer from themselves and I know that there were people that really got screwed from some of the more shady mortgage companies but come on, enough is enough and we have to blame the individual that makes 40k a year and decides that they can afford a 1600 dollar a month mortgage payment. As for the 30 year argument that is made here it is absolutely ridiculous. 15 year mortgages are more profitable for mortgage companies in the short term than are 30 years and with the cash flow problems of so many companies why wouldn’t we encourage a 15 year mortgage. In the company that I am with now, we encourage the 15 year mortgage and emphasize the savings over the long run but it goes on deaf ears. The average american consumer does not think in the long term and only focuses on next month and having enough money to live on. The author of this article is also forgetting that because you are in a 30 year loan it by no means that you have to spend 30 years paying it off and accruing interest. The only reason we offer a 30 year mortgage is to allow the borrower the option of making the 30 year payment when money is tight and when money isn’t we advise the borrower to pay more than the minimum “30 year payment”. The 15 year of course carries a lower interest rate because they are not given an option of a 30 year payment and therefore get a discount on the rate. If the rates were the same there would be absolutely no use for a 15 year loan because the consumer could get a 30 year loan and pay it off in 15 years for the same price and at the same time have the flexibility in payments if catastrophe strikes. We even offer a program where we structure the payments so that a borrower makes an extra payment a year in an effort to shorten the term for them. It actually cuts off 8 years. Would we really offer such a program if our goal was to keep people in their mortgages for as long as possible? In regards to the modification of a mortgage and lengthening term again we are only allowing the customer to have the option of a longer term payment so that they do not become delinquent and ruin their credit or get foreclosed on. It is not a scheme to collect more interest. We as an industry are trying to right the wrongs of our past and have held ourselves responsible for contributing to the mortgage crisis and have made significant steps to ensure that it never happens again. The american consumer needs to do so as well and quit blaming the mortgage industry for all the worlds problems.

  2. John, I’ll “return the favor” by saying that your comment is totally ridiculous.

    If there is even the SLIGHTEST “safety problem” with a motor vehicle, a MASSIVE (and expensive) “recall” is launched.

    If we don’t allow auto-manufacturers and dealers to sell people dangerous cars, then obviously the same logic applies with respect to “selling” people harmful/predatory mortgages.

    As for your comment that banks would “prefer” to write shorter mortgages, what PLANET were you on where you observed such banks?

  3. I was inside and working for 4 different lending institutions over the past 10 years. Where were you when you are making your assumptions? At the very least, we don’t care what term the borrower is put on. Secondly, I was referring to the cost of a car not the safety. Your metaphor doesn’t make sense and mine does. Do you really think that people biting off more than they can chew had a role in the mortgage crisis? Also, if were going to start pointing fingers why are we not pointing them at the credit card companies that made subprime mortgages necessary. If you think that mortgage companies loaned money to people that we shouldn’t have, than what can you say about the credit card companies that absolutely buried people in debt that is nearly impossible to get rid of due to the insane interest they charged and it left people with no other option than to take out a subprime mortgage to get rid of it. The subprime mortgage was risky but no riskier than continuing to carry 50k in credit card debt. The truth is while many people did end up losing their home in a subprime mortgage they were without a doubt going to lose it anyway. The subprime mortgage gave a lot of people a chance to get out of a hole without filing bankruptcy. Many people did not make the most of the opportunity and simply ran the debt right back up. Again, it is not the fault of the mortgage companies that americans forgot how to simply “SPEND WHAT THEY MAKE”. Americans decided that they were going to live the lifestyle that they thought they “deserved” and not what they could afford. They bought expensive houses that they couldn’t afford and unfortunately the mortgage industry decided that they will leave it up to the customer to decide what they can and cannot afford. That was a grave mistake. People are too stupid to be given that choice. We now are drastically tightening guidelines to make sure that the individual can afford the mortgage. Thats what the stated program was all about, taking the borrowers word for it that they can afford the mortgage payment. We will never make that mistake again. The average american consumer is horrible with money and if given the opportunity will “LIVE ABOVE THEIR MEANS”. We now don’t allow it. It is sad also, because self employed people who can definitely afford a mortgage payment can no longer get a loan because we no longer trust the borrowers “word”.

  4. John, your argument that individual homeowners deserve most of the blame is entirely without merit.

    This was a DELIBERATELY created bubble, where its “creation” can be traced DIRECTLY back to the mid 1990’s and the birth of “MERS”. It was also at this time that the banksters were getting the U.S. government to totally open the floodgates on “securitization” (and leverage).

    The result was the CONSCIOUS decision by Wall Street to try to lend THREE TIMES as much money into the SAME housing market. This was accomplished by CONSCIOUSLY throwing lending standards out the window. Indeed people were OPENLY discussing the “liars loans” YEARS before this bubble burst – and DESPITE that all of the (so-called) “regulators” REFUSED to open their eyes to what was taking place.

    If you can’t recognize this all for a deliberate, premeditated scheme/scam, then you don’t know NEARLY as much about this sector as you think you do.

    And 30-year mortgages were a device to HIDE the fact (to the borrower) that these were made-to-fail mortgages. They were/are totally predatory – and there can be possible defense of their existence in the marketplace.

    If you “need” a 30-year mortgage, you CAN’T afford a home.

  5. You make some good points and I will admit that the mortgage industry certainly carries a lot of blame and loaned money irresponsibly. My only point is that it takes two entities to close a loan. A lender and a borrower. If the lenders were loaning money irresponsibly than the american consumer was borrowing money irresponsibly as well. I think your claim that this was all a premeditated scheme is a little ridiculous. Yes, we were irresponsible, yes we didn’t see the forrest for the trees, but we certainly didn’t purposely put people in loans with the idea that they were going to default. We should have perhaps certainly, but the absolute last thing a bank wants is a foreclosure because the bank ends up taking the biggest loss. The borrower can simply walk away from the debt and yes they probably won’t be able to own again for a long time but they shouldn’t have been owning in the first place. The mortgage industry has paid for its mistakes and the fact that 387 lending institutions have failed including the biggest is proof enough. So what is your solution in regards to 30 year mortgages? Would you like us to discontinue them? I’d like for you to ask the american consumer if they would like us to do away with 30 year mortgages and therefore drastically reduce the amount of americans that can own their own home? Go ask them and then let me know. I think the american consumers answer will be enough to end this debate.

  6. Allow me to add that in a capitalistic society supply will always meet demand regardless of the product unless a governing body intervenes. The government is ultimately to blame because it is the governments responsibility to limit supply of products that the american consumer demands but is not good for them. If the government does not step in there is always going to be someone that will fill the demand and reap the benefits regardless of the harm of the product. In this case the mortgage industry is claiming that we “didn’t know”. That is not entirely true. Anybody with half a brain can realize that putting a person with a 580 credit score in a 100% arm loan is a bad idea so the suggestion that the mortgage industry “had no idea” is incorrect. However, no one could have imagined what the consequences were going to be. By the time it was realized it was far too late. It was the governments job to realize it sooner and step in and stop the supply of these “toxic” mortgages. Unfortunately, the government was too busy enjoying the fruits of these toxic mortgage which resulted in a huge economy boom in the mid to late nineties. If there is money to be made someone will make it especially if it is 100% legal. Expecting the mortgage industry to not walk through that door and take advantage is like removing the referees from an NBA game and expecting nobody to foul. Its not realistic. During the mortgage boom if you weren’t selling the loans were complaining about you closed your doors. If a mortgage company only sold 80% LTV loans to 800 credit score borrowers with plenty of income there is no way they would have survived. It simply wasn’t an option. If the borrower qualified for a loan we as loan officers were and are required to offer that loan to the borrower. If the borrower wants it, the borrower gets it! The government need to be there to keep the loans from being sold in the same way the government doesn’t allow drugs, and guns to be sold. Even though the american public wants it, we can’t give it to them and we have to in a way take away their freedom to choose by putting laws in place and locking up ones who attempt to sell these toxic goods. Well the laws are in place and were locking people up that break the rules now. The entire economy needs to get accept their role in what happened, learn from it, make sure it never happens again, AND MOVE ON! The mortgage industry has. I suggest the rest of america does as well. I’m sorry but the individual who ran up 60k in credit card debt with a 50k+ a year income because they wanted to live like royalty and therefore had to max out the loan on their house to get rid of the credit cards and due to the cards ruining their credit they only qualified for a subprime loan and then defaulted on the loan leaving the bank holding the ball because they didn’t do what they were told and do what it takes to repair their credit and therefore couldn’t get out of it, I don’t feel sorry for. They are to blame as well.

  7. I think you both have strong points on either side and I also don’t think you’re really arguing the same thing … Jeff was arguing about the absurdity of the media pretending loan mods are being rolled off in shorter maturity terms, which is a good point. Most are having the maturity terms lengthened which is essentially debt serfdom.

    But John is also right that if you asked the general public if it would like to do away with the 30-year fixed loan they would give a resounding “no”.

    Unfortunately that isn’t as powerful a fact as you might think arguing in favor of the “traditional” 30-year-fixed: the loan is essentially a form of welfare created by the government for the middle class, and nobody likes giving up their welfare (least among them the middle class).

    This is an inescapable fact since it is the government that set up the framework for the 30-year-fixed in the Great Depression.

    The question is why the props remained in place even after the economy recovered. The answer is again simple: nobody likes giving up their welfare, especially the middle class (and of course the banking industry loved this system, because it meant they got paid for taking on very little risk).

    When you look around the world there is really nothing like the US system so I think it is valid to question whether it really deserves all the government props that are put in place.

    In most countries the 30-year-fixed product is rare. That’s because without the government props, banks don’t really want to extend this product as their is almost no upside for the bank (an interest rate locked in for 30 years and if rates go down you get refi’d on and prepaid? What a crappy deal…)

    I believe we could still have 30-year-fixed as the most widespread mortgage product even without government support if the right secondary market system were set up, but few today would like it because it would imply that that rate would be at a much higher level to fairly compensate banks for the risk. However, then maybe people like me could become homeowners (without welfare).


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