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
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…
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!