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On 12 Feb, 2016, at 11:06 am, RS wrote:
Negative Mortgage Rate Program (NMRP)
RS Feb 2016
m (NMRP)
Summer 2016, US and global economic growth rates are no where close to estimates. In fact, global recession, or worse, is imminent. At home, student loans defaults are now close to 100%. Unemployment rate is climbing as minimum wage workers finally realize the financial pain of working or not working are identical. In Euroland, as the weather warms up, the never ending flotillas from Northern Africa are swamping the Southern shores.
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 exclusively providing affordable housing for all - whatever that is supposed to mean. Policy makers 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 declared that the NMRP is a brilliant extension of the NIRP (negative interest rate policy) because it will benefit everyone and not just the 1%ers.
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 would decrease instead of increase.
No need for mortgage insurance since, with no payments, there can be no defaults.
No qualifying needed, hence removing all that cumbersome loan application process.
Say you borrow $100,000 at -1% interest. Here is the math:
Your interest cost would be -$1,000 per year. In other words, your loan balance would be $99,000, if you make no payments at all.
Using a commonly accepted 30 years 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 would be totally extinguished.
Freddie and Fannie would originate these loans. Package them as neg-neg-am-MBS. Sell them all to the Federal Reserve. Housing recovered overnight and the Feds declared, "Mission accomplished."
Before you call me nuts, this is reality. The governments Germany, Switzerland, Japan and others are charging savers for the privilege of lending them money. Why stop there? Let the people enjoy negative interest 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 they borrow, they more they make.
Watching 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 in the cuckoo nest where they belong.
On 12 Feb, 2016, at 12:47 pm, JC wrote:
Over the holidays I reflected on the natural mathematical consequences of NIRP, and am overwhelmed by feeling of ‘new universe discovered’.
Take the traditional venture valuation for a stream of negative and positive cash flows over time, together w/ the terminal valuation of a perpetuity of slowly growing cash flow but heavily discounted cash flow beyond the planning horizon, the formulae being:
NPV = {[cash flow in year W] / [(1 + discount rate) ^ (1 / W)]} + [[cash flow in year X] / [(1 + discount rate) ^ (1 / X)]} + … {[cash flow in year Y] / [(1 + discount rate) ^ (1 / Y)} + {[(perpetual cash flow) / (discount rate - perpetual growth rate)] / [(1 + discount rate) ^ (1 / Z)]}
w/ W, X, Y being 1, 2, 3, …
discount rate being some number typically between 15 - 25%
and perpetual grow rate typically less than 3%
Predictable / intuitive happening is that as the discount rate is varied from 15 - 25% down toward 0%, the NPV goes up and way up. So far so good.
But as the discount rate crosses below the perpetual growth rate, the NPV suddenly becomes a negative number, thus requiring the Excel goal-seeker to concurrently lower the perpetual growth rate to be always below the declining discount rate, else the NPV, instead of increasing, shows red.
As the discount rate crosses the zero-bound, the perpetual growth rate must show rapid decline within negative space, else NPV shows alarming red.
Now we see why the Japanese economy w/ its negative population growth and deflation of prices can be bullish as NIRP is tee-ed up.
Bottom line, from investment perspective, NIRP can work, and work well, as long as the planet’s economy goes more rapidly towards absolute zero (the perpetual growth rate (negative rate) is always more negative than the negative discount rate).
Once the negative discount rate hits -100%, the advantage goes to projects that make losses, the more copious the red ink the more worthy.
Fantastic.
Imagine the IPO prospectuses called for!
Therefore, we are mathematically forced to conclude, that in a NIRP environment, the logical end is a flip-flop of the balance sheet, where heretofor we know as Asset becomes burdens, and what we used to categorise as burdensome liabilities becomes sought after Assets.
The implication for OECD is that the policy-makers, after exhausting the possibilities of printing, must then engender negative growth to keep-up / down w/ negative interest rate, and for China, to remain in normal monetary space of 3% interest rate, must inflate and devalue, as long as growth rate is higher than interest rate.
Guidance, get back the gold we just sold cheap. |
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