Simply the Best — Tina Turner
This week in the comments, we joked about new lending programs for the next real estate bubble. MalibuRenter, the gentlemen who helped with the content editing of my upcoming book, makes a living patenting financial products (among other things). The following is an idea for a new patent (tongue in cheek).
Lending during the Great Housing Bubble was too messy. There were too many loan programs. Since real estate always goes up, and since people want immediate access to this appreciation to spend it like income, a new loan product which readily provides this money is in order. The Option ARM was a major innovation. By allowing for negative amortization, people were able to add to their loan balance and effectively “cash out” their equity. The problem with this loan program is that it didn’t go far enough — people still had to make payments, and they had to get HELOCs to extract the remainder.
The new loan program I am proposing is called the “Pay You” loan, or PU for short. The PU loan has no payment of any kind. The total amount of interest each month is added to the loan balance. Further, appreciation in excess of this monthly interest is sent to the borrower each month. Rather than pay for an updated appraisal each month to determine value, an automated reappraisal system which looks at the current pricing of comps can accurately determine the current market value. Since homes now pay cash to owners each month, home ownership would be very desirable, and home prices should rise steadily far in excess of the monthly interest cost. With automated appraisals, little additional servicing costs would be required. Also, lenders would find the monthly service fees an attractive feature, so they would readily peddle the PU loan to any borrower who wanted it, and since borrowers are actually being paid to own their home, everyone would want to enroll in the program.
These loan programs would be very attractive to investors because the interest income would be booked as profits, and since the balance is growing each month, the interest income gets compounded. The main problems investors in mortgage loans have is that borrowers often pay back these loans early, and the balanced decline over time. Therefore, they do not receive the rate of return reflective of the stated interest rate. With the PU loan, investors actually get a greater return due to the compounding effect. The early payback is not a problem because even if a borrower sells a home, they will quickly buy a new one to get back on the home appreciation gravy train. The PU loans may even allow for assumability and portability so the loan doesn’t need to be closed out when a buyer wants to move up or sells. It is a panacea.
Now we just need home prices to always go up…
I call you,when I need you my hearts on fire
You come to me, come to me, wild and wild
You come to me, give me everything I need
Give me a lifetime of promises and a world of dreams
Speak the language of love like you know what it means
And it cant be wrong, take my heart and make it strong, baby
Youre simply the best, better than all the rest, better than anyone, anyone
Ive ever met!
Im stuck on your heart, I hang on every word you say
Tear us apart, baby I would rather be dead
In your heart I see the start of every night and every day
In your eyes, I get lost, I gte washed away
Just as long as Im here in your arms I could be in no better place…
Simply the Best — Tina Turner