Bail out: Savior or Killer?

The Chinese have a proverb: “May you live in interesting times.” And we are living through interesting times indeed.

Whatever the political posturing regarding the current rescue plan, some believe a plan needs to be passed. We are told credit markets are frozen and banks are going to go bust every day. If this is happening it is not totally because of "toxic" mortgages. It has a lot to do with FASB 157, also known as "mark to market".

Each day lenders must mark their assets to the marketplace. It's like you having to appraise your home everyday and if your neighbor was under duress because they got very ill, divorced, lost their job and was forced to sell their home quickly they may have sold it super cheap. Now, does that mean your house is worth that super cheap price? Clearly not. Why? Because you are not under duress. You have the time to sell your home and get a more normal price, which more accurately reflects true market conditions. But "mark to market" does not allow for this, which creates a vicious cycle.

Why is this so bad? Because as lenders mark down their assets, the amount that they have loaned previously becomes much riskier in relation to their assets. For example, say a bank has $1 million in assets and say they have $15 million in loans outstanding. Their ratio is an acceptable 15 to 1. But should they take a paper write down of $500 thousand due to "mark to market" requirements, their ratio suddenly changes to 30 to 1. This is because their assets are now only $500 thousand after taking the paper loss, while their loans outstanding are $15 million. And at 30 to 1 this bank is viewed as a risky investment. So the stock price starts to get hit, it becomes harder to borrow, and most importantly harder to make money. The bank is then forced to sell some of its loans to reduce its ratio...at cheap prices. And this makes the vicious cycle continue.

And a quick look at the holdings of these loans show that 95% are problem free. Additionally, the Credit Default Swaps (CDS) that are used with the pools of mortgages are relatively safe. But this requires a bit of understanding. You see, when a pool of mortgage loans is put together, it isn't just A paper or B paper etc….it's everything. It’s got some A paper, B paper, C paper…and even what looks like toilet paper. An "A" investor buys the whole pool but because they are an "A" investor their safety is greater because they can avoid the first 20% (an example) of defaults. So they own the whole pool but are sheltered from the first batch of defaults, and for this they get the lowest rate of return. As you can figure from here the more risk investors want to take, the higher the return. So the investments are relatively safe, but the accounting rules currently place undue pressure on the banking institutions.

Now add to all this, the opportunistic “shorting” done on the financial stocks, much of it illegal because those shorts did not legitimately borrow shares (called naked shorting), and you exacerbate this whole problem. Thank goodness for the recent temporary ban on shorting in the financial sector. As for the plan, the government is the only one who can step in to do this. Is it the right thing to do only time will tell.

This is not easy to understand for the general public. In fact, most politicians don't get this either. That's why it is a difficult bill for them to vote on.

If this is done we are being told that it will take some time but the markets will stabilize. As for the real estate and mortgage industries, it will take a bit of time but we will make it through this. Rates will remain attractive and the influx of credit availability will help the housing market gradually improve.

Will this ultimately be the medicine needed to improve the situation overall or will it kill us? Only time will tell.

Lehman files for bankruptcy after 158 years

Lehman files for bankruptcy! This was a 158 year old company.
Freddie Mac and Fannie Mae in conservatorship!
Bank of America to acquire Merrill Lynch!

Greed does affect us!

Greed is what took these institutions down. They invested in very risky mortgage loans and those mortgage loans destroyed these companies. This is not the last we’ll hear of destroyed mortgage investors.

We have known for quite sometime that the waters had not settled and we were still in trouble in the financial markets. These announcements prove that correct. And rumors have it that there are more big fish ready to implode.

One example is AGI the insurance giant. They have to raise cash now or they will go under.

How can you benefit in these rough economic times?

With the fall of Freddie and Fannie it appears there is an opening for those of us with good credit and higher mortgage rates to refinance our homes. Mortgage rates are falling and the 30 year fixed rate looks to be headed to the lows of 2003 when we hit the lowest rates in 45 years.

Or

Buy a home. If you have to sell yours you may not receive the price you would have received two or three years ago but you will also not pay the price you would have paid two or three years ago. With mortgage rates dropping and home prices depressed it is the best time in decades to purchase a home.

You can take advantage of the greed of the past. Refinance or Purchase a home today.

Home Builders have they learned there lesson?

I was talking with a prospect the other day and he was trying to buy a home from a very large national builder. He put a substantial down payment down on a spec home. He did not like the builders financing options and wanted go to a lender that the builder did not own. His contract with the builder stated he could use any lender he chooses. However, he was told by the builder that they would not sell the house to him if he did not use their lender.

Why would a builder do this? They must be making a great profit on the financing and you know they are because their rates and terms are not competitive. Why does the contract state you can finance anywhere when they force you to finance with them? My guess is that the builder knows that they are in violation of RESPA but feels they can keep out of trouble if the contract says you can finance with anyone.

This is the type of behavior that got us in this credit crunch predicament in the first place. We need to stand up and put a stop to companies running over our rights as consumers. My advice since the government won’t put a stop to it, we as consumers must put a stop to it.

Stop buying homes with builders that want to control the financing, it is not in your or the countries best interest. Of course, it’s in the builder’s best interest or they wouldn’t be so deceptive and forceful.

I went through that because it shows that with all the talk some of the causes of the mortgage crisis are still alive and well. We need to put companies that disregard the laws of our country, put themselves ahead of their customers, and put our economy in danger out of business. Some will say I am over reacting but that is what I was told when I warned about the abuse of mortgage programs just a couple of years ago.

If you are buying a home from a builder protect yourself and the rest of us. Tell them you will not finance with their mortgage company. If they insist then do not buy from them. If they don’t care about us then we should not care about them.

Home Builder Calling

I am getting calls now, that just a few short years ago, I would have told you I would never receive.

Builders are calling, developers are calling, and they are looking for money. These builders and developers just a couple of years ago would not talk with me. They would not take my calls. They did not need our money. However, times change, and it has changed greatly.

Builders cannot find money to build spec homes. Developers are wanted to sell home sites so they are trying to help. Developers are calling to see if we still loan on spec homes. These developers are willing to helping in the financing, putting their money and credit on the line.

What does this all mean? I believe this will seriously limit new construction and help eliminate the excess home inventory that exist today. It means that the real estate market will improve as home inventories decline.

Keep a positive outlook we are working our way out of the housing and mortgage crisis.