Real rate mortgages: $1.5 Trillion cash for borrowers, consumption up $420 billions, house prices up between 15%-25%, no cost for taxpayers.

omega — Tue, 25 Aug 2009 13:40:44 +0000

Real rate mortgages could be a great solution for real estate markets and the economy. Changing present FRM and ARM to real rate mortgages could leave during the next decade $ 1.5 Trillion in borrowers’ pockets due to lower initial loan payments, a $420 billions increase in consumption due to wealth effect, and lift up house prices between 15%-25% in the short term.

See how:

real rate mortgages – benefits for US markets

New financial products to stabilize the real state market

omega — Wed, 29 Jul 2009 14:34:09 +0000

Nominal interest rate mortgages (NRM), like Fixed Rate Mortgages (FRM) or Adjustable Rate Mortgages (ARM), are predominant in the present mortgage loan market. Banks usually prefer NRM to other kinds of mortgage loans as they offer them some advantages, like smaller losses when borrowers default. In contrast, NRM imply one of the main risks for banks, as they are one of the causes of real estate market crises. NRM induce banks to grant lower loan amounts and demand higher loan payments to ARM borrowers, when interest rates rise. Even small rates variations influence drastically on demand, as buyers have access to lower mortgage loans, and supply, as defaults and foreclosures increase. The changes concern all market agents and their expectations, turning the individual risk of default a systemic risk of collapse. NRM are particularly harmful when interest rates rise due to higher inflation, as NRM induce higher prices drops than expected changes in Net Asset Value (NAV) of assets.

Previous crises brought us new institutions and financial products that have been useful for the economy. In order to contribute to the real estate market stabilization and restore market’s confidence, I propose a set of financial products. 1) Real rate mortgages (RRM), in order to mitigate the negative impact of higher inflation, 2) Loan payment softeners to mitigate loan payment increases due to higher real interest rates and 3) Stabilizing options to mitigate negative effects of real rate increases on loan amounts. Although the suggested financial products apparently increase some risks for banks (due to slower or even negative loan returns), profits for banks and the economic system are significant. Similar financial effort for borrowers during loan’s life, steadier real estate market prices, real estate market immunity against inflation, lower probability of defaults, steadier loan to value (LTV) ratios, lower quotes for present borrowers, higher loan amounts for new buyers and higher real estate prices in the short term. The introduction of these financial products in the market may have no cost for taxpayers and help all economic agents.

Read the full text if you are interested. Here you have a first draft. I’ll be glad to take into account your comments to improve it. Thank you!

RRM_LS_SO_REM