The father of three eased into a chair. He is in his late-thirties. He works hard at both of his jobs. He and his wife, he said, are very careful about spending. They live without a sign of grandiosity. Both of their cars have more than 100,000 miles on them. The cars are good for more miles, but repairs are becoming more expensive. So are the kids.
The problem, he said, is there just didn’t appear to be any relief. Not now. Maybe never. Like millions of other workers, the income from his main job is not increasing. It is stable, which he thought was wonderful, but it isn’t increasing. The career with regularly increasing salary income that he had hoped for no longer exists.
And what about his other job— the one he works at on weekends? It provides some of the money he had hoped would be coming from his main job. It is good work. But it can never grow to replace his main job. It’s piecemeal, nothing to count on.
The only way he can see to create some breathing space, some margin for error, is to refinance their house. He handed me some worksheets detailing the estimated costs for mortgage refinance proposals. They would, he said, cut his expenses nearly $400 dollars a month. That’s the equivalent of a very healthy raise.
“These would eliminate PMI,” he said, referring to primary mortgage insurance. “They would also reduce the interest rate by about 1.5 percentage points. There’s just one problem. I’d have to write a big check at the closing—about $25,000. It might as well be a million. I don’t have that kind of money.”
Very few people do, particularly those with young children.
We’ve become accustomed to real estate disaster stories— stories of homes in foreclosure, of families forestalling foreclosure, of couples making payments while surrounded by a sea of foreclosures, etc.— but millions more people are like this father of three. They trudge on with less drama. They hope something will change their circumstances. Mortgage refinancing is one of those somethings.
But they are prisoners of PMI and prisoners of their mortgage.
This particular example is in Dallas, Texas, an area largely spared from the debacle that has made Arizona, California, Florida and Nevada into disaster areas. Five years ago he and his wife bought a new home in a Dallas suburb populated by other couples with young children. Their motivation was simple and selfless: they were looking for good schools.
They got in with a 10 percent down payment. Because of the low down payment the mortgage also required them to pay premiums on a primary mortgage insurance policy.
The idea, then, was that home appreciation would bring their equity to 20 percent in five years or less. Then they would be able to refinance, perhaps to a lower interest rate. They would eliminate the PMI payment at the same time.
It didn’t happen.
Now they are prisoners of both. They pay PMI and a bit over 5.5 percent in interest when new mortgages were available at 4 percent. For them, it seems like a deadweight loss.
And for them, it is. But the dilemma is really about who has income and who doesn’t. One household’s lunch, it turns out, is another household’s dinner.
The mortgage we’re talking about is part of a package of securitized mortgages. The mortgage securities, in turn, are owned by a mutual fund that specializes in pools of home mortgages. Someone who depends on interest income, probably a retiree, owns shares of that fund. The retiree has seen the interest he collects drop year after year as those who can refinance. At this point the retiree is wondering how long his savings will last. He is spending principal as well as interest to pay his bills.
If the mortgage were refinanced, it would disappear from the mortgage package. The interest income would decline, as it has been for years. One household would enjoy an increase in spendable income. Another would suffer a decrease in spendable income. Who gets to spend money would change, but the amount of money available to spend would scarcely change.
It’s a big sum-zero game— except it doesn’t feel like a game.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
(c) A. M. Universal, 2012