Topic: "Adjustable 2nd Card"(3)
Frodo once knew a man who purchased a home in the suburbs, and encumbered himself with a 30-year fixed-rate mortgage on $18,000. The same man never possessed a credit card; paying cash or writing a check for every single transaction in his life. Frodo has several credit cards, although he pays the entire balance due each and every month. Frodo has also financed and re-financed his home in the Shire in order to take advantage of dropping interest rates. It should be added that he has borrowed against the value of the house on two occasions in order to satisfy very sizable expenses, but paid off the resultant second mortgages shortly thereafter. The man mentioned in the first sentence of this paragraph thought Frodo was a spendthrift and that he ran risks far too reminiscent of those who neglected margin calls in 1929. By that time in his life, he was an old man.
Frodo stood in front of a subdivision near the Shire noting the advertising sign out front. The sign reads, "Priced in the $900's." Frodo has tried, on several occasions to compute the monthly payment on a traditional 30-year fixed-rate mortgage, with 10% down, at current rates for such a piece of property. Small beads of sweat form all along his declining hairline.
Adjustable rate mortgages were the avenue that allowed Frodo to purchase his first piece of real property, so he comprehends the transition to mortgage products which offer opportunity to the first-time buyer. Reflecting his upbringing, Frodo converted that loan to a fixed-rate at a lower rate some years into that transaction. The problem, and what has given Frodo night sweats for some time, are the "products" which have given buyers access who never purchase equity, but only pay interest on the loan amount. There are many buyers who gamble that the value of the property would continue to grow, and that this inflation in value would allow them to someday sell the property at a price far above the loan amount. That is sort of like the guys who didn't expect their margins to be called in October of 1929, or so it seems to Frodo.
The number of foreclosed properties is skyrocketing all across Middle Earth. The mortgages on those properties were almost always sold to another company in a "package" with many other loans that carried a combined face value in the tens of millions, and beyond. When the values of the properties no longer increased, and the borrower was unable to keep up the payments, then the purchaser of the loans lost some really big money. These purchasers needed cash to meet their obligations, and to prevent them from dumping these packages at any cost. Really big investors were then circling over the carcasses and could infuse cash by "investing" in the company holding the packages.
Frodo thinks often of a book he once read called "The Octopus," written by Sinclair Lewis.
Frodo is very much an advocate of free enterprise, of investment in good and growing companies, and in the ideas of those who are searching for new and better ways of doing everything. He is, however, not stupid. Like the old man who thought him a spendthrift, Frodo learned that the process rarely works for those blinded by greed and an unwillingness to start with a two-bedroom, one bath "starter" in a settled neighborhood.
That piece of property mentioned in the first paragraph, which was originally a two-bedroom starter, mortgaged by Frodo's father in 1953 and sold in 1969, recently sold again for $7 Million. Had he not already passed, Frodo's father would have had a heart attack.