'Teaser' home loan rates of PSU banks cause concern…

The Global economy is fast recovering…cannot say…only based on Infosys’ quarterly results! Rather I see inflation growing at rapid ate and worse speculating on a daily basis. The growth rate of India for this year 2010 is estimated at 8.5 % and I do feel that it can happen! (US growth rate pegged at 3% so I see all the FDI flowing in to India)

Will Indian economy be consumer-driven like in the west? No! I do not see that happening ever…being a traditional conservative society especially where there is no government sponsored social security scheme. The basic attitude is not to be spend-thrift allowing self-denial to take precedence among large numbers of the market. Despite foreign exchange ‘excess’ India would not live in debt…

What has brought about ‘concern’ to me pertains to what PSU banks are indulging in…lending home loans at ‘teaser’ rates of 8.0 to 8.5% for the initial few years and subsequently raising the same in the following years ( ‘marketing’ efforts to promote more disbursal ). Are we worried about sub- PLR crisis? No! The regulator RBI (Reserve Bank of India) would not allow it to happen.

Besides all the steps taken by the goverment, Subprime is invalid in India due to the following reasons:

a) Banks don’t bundle their loans and sell them as CDOs ( Colaterized Debt Obligation.. meaning pool of ‘funds’ ) in the market. There are refinancing mechanisms in India but not CDOs.

b) CDS ( Credit Default Swap…by taking insurance policies) on CDOs are impossible since CDOs doesn’t exist

c) There is no AIG (or Lehman) to sell CDS to “owners and non-owners” of CDOs, thinking they will continue to get only the premiums and never need to pay for defaulted CDOs assuming home owners never default on their home loans…like it was done in US.

d) Hence the question of “Subprime” in India is invalid. It is only…normal default on loans which is corrected by the banks in time.

Of course, the RBI is watching all the time! Now, the PSU banks are being asked to educate buyers on the ‘teaser’ rates so that they are able to pay higher rates in the subsequent years after ‘promotion’ period ends.

Of course I did some reading to understand the topic! Comments please!

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2 thoughts on “'Teaser' home loan rates of PSU banks cause concern…

  1. Very articulate ! You have done well in explaining the CDO and CDS concepts. What you are referring to as teaser rates, may be somewhat akin to ARM (adjustable rate mortgages). The ARMs are premised on the fact that, if one wants to predict that interest rates will go down in say 3, 5 or 7 years, one would bet on taking a discounted rate now, with the understanding that the “teaser” or adjustable rate will expire in 3, 5 or 7 years, and the prevailing interest rate will become effective.
    In these days that may not be a very smart move, as (in a global economy), all the banks are affected by the tightening of fiscal policy in the US or China etc. For example, China has decided to increase the interest rate there to soften the rapid expansion of the housing market there. This has been understood to be a pre-emptive move to prevent a housing bubble like the one in US, Ireland etc.
    So ARMs are Ok, as long as there is no pre-payment penalty, or the customer’s hands are not tied, and if they are – then they are clearly spelled out in the contract.
    I like fixed rate mortgages, because I don’t want to play with that, but I know friends who have used ARMs to get to a point where they can re-finance a mortgage to either another ARM or a fixed rate (FRM).

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