I don’t normally divert from my normal topics of the semantic and structured Web, but a serendipitous event of the past week warrants an exception, I think.
Last week, I was at my local bank arranging a new transaction for me involving an international wire transfer of funds. It was taking a bit of time as the staff put all of this in place for future transactions. Because I had some time, I asked the local manager to fill me in on mortgage rates, etc. I could not really remember the details of my own current home mortgage, so the upshot was to have one of the bank’s mortgage bankers give me a later call.
The next day I got the call back (kudos to Cindy Lynch at MidwestOne and exceptional service!). Within two days, we have now refinanced our home mortgage. While there is no need for our specifics or details, what I found blew my mind and may have some broader implications.
We have good — but not exceptional — credit ratings and had 8 yrs remaining on a 15-yr fixed loan. When we got that mortgage in 2002, the rates were as low as they ever had been at that time. Though I knew rates had dropped somewhat, I also thought current rates were not sufficiently lower to justify a refinancing.
I was wrong.
Circumstances will certainly vary due to many, many aspects, but, in our case, we learned we could decrease our monthly mortgage payment by 30% while only adding a year to our payoff period. Furthermore, we are able to recoup the total closing and mortgage refinance costs in a bit over a month. Needless to say, we jumped at the chance and locked in a refinancing today.
That is all well and good and would have remained just a family matter except for something we realized over dinner tonight: We are being patriots!
And here’s why.
Much of what apparently is sick at the core of the current worldwide financial mess is “toxic assets”, most of which are due to property mortgages and financing. For example, our personal existing mortgage holder, Washington Mutual (WaMu), in fact, was one of the troubled firms recently gobbled up by JP Morgan Chase, at a purchase price of $1.9 billion based on an book asset base of $310 billion; in other words, less than 1% on the dollar.
Wow. Simply, wow.
These things happen because of uncertainty and fear. Because of its mortgage basis, however, no one seems to know what the true valuation for these companies might be because we have this fundamental circumstance:
|(toxic assets) + good assets|
And, of course, no one seems to know what the various ratios and aspects are.
Now, however, if each of us good citizens goes forward to refinance our homes, by the way saving money to boot!, we now could see the equation shifting as follows:
|existing assets – good assets|
By refinancing, we have shifted existing assets from uncertain to good, thereby reducing risk and saving money at the same time! The denominator of what is at risk is decreased, and the numerator of what is of concern gets clearer and becomes smaller.
This is, of course, a bit naive, since demand for refinancing may reduce the mortgage rate split and thereby reduce the individual homeowner’s incentive to even participate. But, even if the total appraised value of your home has decreased, that does not affect your ability to refinance so long as you meet standard ratios, which remains true for the vast majority of us.
So, even if each of us only saves a few dollars per month by taking this approach, we can both save ourselves money and help increase certainty.
Absent each of us contributing in this way, some body or system will need to be put into place to look top down and inspect all of these asset holdings. Just like the Internet has shown us the power of collective effort across many, many individuals, each of us chosing to refinance can multiple many fold whatever sort of centralized solution the government might eventually be able to mount, and quicker while saving ourselves money!
It is that simple. This effect and delta may not last forever, but each of us has some power to act in a minor and ultimately forceful way to help work ourselves out of this mess.
I suspect what I have discussed above applies to most countries and circumstances around the globe. If my example and the money is too centered on the US, just replace with your own currency and terminology. I think you will still find that you can save yourself money and be patriotic!