Before you cut up your credit cards in an attempt to curb spending, or purge old accounts, stop and consider the consequences. It seems rational to close off old credit card and retail accounts that you no longer use, but it may end up hurting your credit score.

When it comes to getting a mortgage, car financing, or any other credit, your current score will play a factor. Keeping your score high can save you thousands of dollars by qualifying you for better interest rates and lending products.

Credit Score Factors

There are the 5 main factors that influence your credit score:

• 35% Payment History
• 30% Amounts Owed
• 15% Length of Credit
• 10% New Credit
• 10% Type of Credit

Length of Credit

Under the length of credit category there are a couple of metrics which impact your score.

First, how long have you had access to credit? The longer you’ve had credit and paid on time, the better.

Second, what is the average age of your various credit accounts? Again, the longer, the better.

Why Keep Old Accounts Open?

In most cases, it is best to keep old accounts open. Provided you have a good payment history on these accounts, closing them will only hurt your score. By closing an old account you will usually reduce the average age of your trade lines. In some cases, you may even shorten the length of your credit file. Keeping accounts open will also increase your total available credit which reduces your overall utilization percentage at any given time.

On the contrary, if you have a poor payment history on an old account that you no longer use, closing it may be best since it will eventually drop off of your file.

Either way, always think carefully before closing any old trades. Doing the seemingly logical thing may actually hurt your score. If you have trouble controlling your spending, you can still cut up the cards, just don’t close the accounts.

photo credit: kainr

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

STOP! Don’t Cut Up Your Credit Cards if You Care About Your Credit

In one of my previous posts I mentioned I had used my credit cards to buy a piece of property. It took my partner and I 33 days to sell that house and pocket a nice profit after paying off the cards. The rules are now changing for credit cards. You can still use them to withdraw cash but here is a twist you may not know about.

I call this kind of stuff things that go bump in the night. An overworked phrase perhaps but one that fits this particular scenario. Since most of us aren’t solo creatures we have families and families include children.

Children have a way of growing up and wanting the same things you and I have. And, as parents, we try to give it to them. Credit cards in this case.

New Ruling That Is A Zinger

I don’t intend on covering every credit card rule change. That would be a huge waste of time. I’ll only cover this one because its potential impact is huge.

It seems in certain situations your, let’s say, college bound child will only be able to get a credit card if you co-sign for him or her. What’s changed you may be asking. The Federal Reserve’s opinion on what credit card issuers want to do to you after you co-sign.

By the way, even if you aren’t required to co-sign, issuers will likely start appealing to parents to co-sign their children’s credit cards. If you are wondering why they would do that, you can thank the aforementioned Federal Reserve.

As it turns out, the wonderful organization known as the Federal Reserve (they control credit card issuers) has specified that issuers have the option of keeping the parent on the hook even after the young person turns 21. Think about that for a moment and extend your temporal horizon.

If your son or daughter keeps the credit card for 20 years, the co-signer – you – will be liable for the entire 20 years. I don’t know about you but I believe that piece of unpublished technicality will have a huge impact on a large number of folks.

So, in keeping with my philosophy of paying attention to other arenas that have the potential to impact my real estate investing, I put this news on the table for you to digest. Do with it what you will. Hopefully, you’ll never be placed in that predicament.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

More Things That Go Bump In The Night: A Look at the Credit Card Act of 2009′s Possible Impacts

For homeowners facing foreclosure or bankruptcy–or considering a short sale of their property to avoid one or both–the effect the action will have on their credit is undoubtedly a huge concern. Though keeping their homes might not be an option at this point, there could very well be another one in the not-too-distant future, so knowing when they’ll be eligible to qualify for another mortgage is important. 

Be Aware of the Rules of the Road

Earlier this year, Fannie Mae updated its credit guidelines for borrowers who experience one of these circumstances. And, in general, the wait time will now range from two to five years. 

Homeowners who lose their properties to foreclosure or file multiple bankruptcies within a seven-year period will have the longest wait–five years. 

In the case of foreclosure, additional requirements and restrictions will apply after five years and up to seven years as well, which include making a minimum 10% down-payment, having a credit score of at least 680, and having limited cash-out refinance options. Also, the purchase of second homes or investment properties is not permitted. 

A shorter time limit (three years) does apply to both foreclosures and multiple bankruptcy cases if the borrower had what Fannie Mae considers to be “extenuating circumstances” that led to the foreclosure. Of course, the borrower must provide evidence and documentation that the action resulted, from, in their words, “…nonrecurring events…beyond the borrower’s control that result  in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.”  

Borrowers who experience a deed-in-lieu foreclosure must wait the next longest period–four years. However, if they suffered what Fannie Mae considers extenuating circumstances, then they too can qualify to have their waiting period shortened (in this case to two years). 

Bankruptcies–with the exception of Chapter 13 judgments–also mean a four-year wait from the discharge or dismissal date unless–once again–extenuating circumstances apply. In that case, the wait is cut in half to two years as well. 

Two years is the standard waiting period for pre-foreclosure or short sales (whether the mortgage was delinquent or not), as well as Chapter 13 bankruptcy judgments. There are no exceptions permitted for extenuating circumstances, however. 

Requirements to re-establish credit

In all cases, there are several requirements that must be met before credit can be reestablished. These include: 

• Having all accounts current as of the date of the mortgage application
• Including a minimum of four credit references (one of which must be housing-related and cover the period following the foreclosure, bankruptcy or short sale)
• Include no more than two installment or revolving debt payments thirty days past due in the last twenty-four months, or any payments sixty or more days past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action. 

Of course, this is a general overview of Fannie Mae’s new credit guidelines; for more detailed information, please visit their web site. 

Knowledge is power, and knowing the credit consequences of the various actions mentioned above can help a homeowner in financial trouble decide which course to pursue. As an agent, having this information to pass along to your clients, and having a resources behind you to help keep you updated on the latest legislation and guidelines—as well as help you provide them with foreclosure-prevention options—can help make you their super hero!

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Borrowers Should Be Aware of the Effects Foreclosures, Bankruptcies and Shorts Sales Will Have on Their Credit

Many apartment buildings are now facing foreclosure because of falling prices, stricter underwriting guidelines and 5 year mortgages becoming due. For the astute buyer of apartment buildings these apartment building foreclosures could represent an investment windfall.

As a glaring symbol of the burst bubble in national residential real estate prices, the National Association of Realtors announced recently that a full 63% of homeowners in Las Vegas are now “underwater” in their mortgages. This simply means that they owe more than their property is currently worth. For many of these people, it simply makes no economic sense to continue paying for their mortgages when the underlying asset is no longer worth what they owe. This situation will probably lead to further foreclosures and further declines in real estate prices. As all eyes are currently watching the steep decline in residential real estate prices and rising foreclosures, the commercial side of real estate has hardly begun to realize the problems that may be looming on the horizon for many apartment building owners.

Homeowners in Las Vegas, for example, who are able to continue paying their mortgages may decide to hold on to their property for a few years and hope that real estate prices recover. They are able to make this decision because, presumably, they have 30 year mortgages. In contrast to residential mortgage holders, many investors in commercial real estate are holding on to 5 year mortgages. This means that they will be forced to refinance their properties when the notes become due and it couldn’t be happening at a worse time. Many apartment buildings rose in value right along side residential real estate prices and too many of these owners paid too much for their properties because they figured that as long as they were seeing a net profit every year from their rent collection then they had nothing to worry about.

Market Conditions Lead to Great Opportunity in Apartment Market

During the real estate investing frenzy apartment building buyers didn’t take into account the possibility that real estate prices would drop so precipitously is such a short period of time. Now, many apartment building owners are facing a dire situation. For example, let’s assume an apartment building investor purchased an apartment building in 2005 for 1 million dollars. He came out of pocket for $200,000 and he financed the purchase with a 5 year balloon note that becomes due on January 1, 2010. He financed 80% of the purchase price. In the last years, however, the market price of his apartment building has dropped 20%. It is now appraised by the bank as being worth $800,000. Unfortunately, when he goes to the bank to get a loan, the loan officer tells him that the bank has changed their underwriting guidelines and they are now only willing to finance 70% of the appraised value of the property. Now, he is only able to finance $560,000. The problem is that he still owes just around $800,000 on the property. The difference between $800,000 and $560,000 is $240,000. Unless the apartment building owner can come out of pocket to pay this additional $240,000 to the bank then he will eventually be forced into foreclosure. It is safe to assume that many apartment building owners will make the same choice that thousands of home owners have, to walk away from the mortgage and the property, chalking it off as a lesson learned.

For the first time buyer of apartment buildings, this could be a windfall in the making. There could be thousands of properties, in good condition, appearing on the market at rock bottom prices.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Apartment Building Foreclosures Create a Buyers Market for Apartment Buildings

Could anything be worse than the foreclosure crisis? People who purchased more expensive homes than they could afford or used risky mortgages to obtain them are losing their homes in record numbers. Banks who aggressively pushed loans on poorly qualified borrowers are suffering the consequences. The economy has been dragged down by the crisis. Will this be the last financial crisis? Unfortunately, no.

While mortgage debt in this country is somewhere in excess of $10 trillion, it is secured by the underlying real estate. While lenders suffer losses in the foreclosure process, they do generally recover something. The looming problem is with consumer debt, both secured and unsecured. Secured debt would be auto loans and other obligations backed by an asset. Like home mortgages, the assets could be repossessed if the buyer defaults and the lender stands to make at least a partial recovery.

It is the unsecured debt, mainly credit card, that is looming as a huge problem. According to the Federal Reserve, consumer debt was more than $2.55 trillion as of December 2008. Almost $1 trillion of that was revolving (credit card/line) debt. It is the unsecured debt that is the riskiest form for the lender. It can be wiped out through bankruptcy or otherwise be difficult to collect when a borrower defaults.

Unprecedented Growth

In 1999 consumer debt was approximately $1.5 trillion, ten years later it is 70% higher. Household income has been fairly stagnant during this same period of time. What does this mean? It means that people have been using credit to fund a lifestyle that is higher than their income would justify. Big surprise.

Just as they did with mortgages, banks have aggressively marketed credit cards, often to people who shouldn’t have them. Their insatiable thirst for bottom line profits have left them with another time bomb of “toxic” assets. As the recession deepens more and more of these borrowers will default. People are using credit cards to hang on to a standard of living that no longer exists. What will they do when there is no credit left on those cards?

Foreclosures are a much more visible consequence. Vacant houses with for sale signs with a banner reading “bank owned” illustrates the situation clearly. Credit card defaults aren’t so easy to spot but the consequences are just as ugly. Many banks will have their ability to lend impaired or fail altogether because of this. Just another turn in the downward spiral we are in.

The Cash Standard

The country as a whole needs to return to a time when we saved to buy what we wanted instead of expecting instant gratification. Credit should be used for emergencies, and a 50% off sale at Macys is not an emergency. The paradox is that for the economy to recover consumers need to spend money. The Government understands this and indicated as much with the tax cuts in the recent stimulus package. Rather than sending people checks as they did in 2008, the cuts will show up in weekly paychecks. It is such a small amount that, in theory, people will just spend it and it will stimulate the economy. We’ll see how it works out this time.

In his book, The Total Money Makeover, financial guru Dave Ramsey advocates using cash instead of credit or debit cards. Studies have shown that people will spend significantly less when paying with cash as opposed to plastic. He is also a proponent of living a debt-free lifestyle and advises people to eliminate their debt as quickly as possible.

Try this challenge: for the next week leave the credit and debit cards at home. See if you spend less by using cash. More importantly, see how much more attention you pay to your purchases.

Debt, n. An ingenious substitute for the chain and whip of the slavedriver.
– Ambrose Bierce

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Another Financial Crisis Looming?

This makes sense if the questions were truly new questions engineered for the times. However, after you read the questions, I bet you too will want to know why weren’t these the questions from day one. I write about this stuff because this is the type of mentality that is making decisions on who gets a loan and who doesn’t get a loan.

To me, it is frightening. If one is to measure the qualifications of an individual before granting credit, these questions should form the base of any risk management program.

The Questions

These 4 questions aren’t all of the questions but they seem to form the nucleus of the supposedly new thinking. For the life of me, human behavior has been known to change along with the times for as long as I’ve been alive so where were these questions before the crisis?

1. How has my customers’ spending and payment behavior changed?
2. When did their behavior change and by how much?
3. Has the behavior of all of my customers changed or just that of certain segments?
4. What are the major contributing factors to the various changes?

I found these four questions by the way in the February 2009 issue of Collections & CREDIT RISK magazine in an article titled, “Managing Risk in The New Credit Environment”. The article was written by Edmund V. Tribue. I’m not saying Mr. Tribue is out of line or incorrect. I’m saying these really aren’t new questions or new risk management parameters.

The risk manager, in my opinion, should already have a handle on this type of information. When a person applies for a real estate loan for example, his or her spending and payment behavior is pretty apparent and easily accessible from their credit report. If you were a credit pulling landlord or lender, wouldn’t the answers to the above 4 questions scream out at you from the credit report as well as the answers to a few questions of the applicant?

I don’t believe it is the job of real estate investors to be the macro manager of the credit world. But I do believe it is our job to stay on top of our customer’s behaviors in our personal micro real estate arena. If we don’t, or won’t, aren’t we dooming ourselves to failure?

Your Local Newspaper

Believe it or not, your local print newspaper is probably a good source on the credit aroma in your area. I know our paper is not shy about printing news about problems in the local financial world. It tells us about foreclosure filings, credit card default rates, business failures, etc. I could be lucky in that respect. However, you may enjoy such info in your neck of the woods.

Of course, other sources exist and you may have to rely on them where you live. The local real estate association is a good start. You may even have a local lender’s association. Many regions have real estate investment clubs which are excellent information cauldrons.

So maybe new isn’t really new after all.

Photo Credit: danflo

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Questions & Risk for Lenders In The New Credit Environment

About two months ago I wrote a post that included information from a monthly magazine, (sic), I read religiously. I like the magazine because it gives me a more clear picture on the credit industry given the article writers are industry insiders.

I received my January 2009 edition this past Monday and found some interesting perspectives about the coming year. I thought I would share them with you and let you ponder them to see if they jive with your thoughts.

Credit Industry Tones

Darren Waggoner is the editor and writes a column called editor’s letter. In this edition he quotes the results of an informal poll the magazine ran this past year. He says the tone of the response from the readers is summed up thusly:

The impact with Obama and a Democratic-led Congress will be horrific to our industry (credit and collections). Those fortunate to survive this recession will then be faced with more regulations. Consumer advocates will thrive and collection agencies will be riddled with compliance and regulations that will literally render us ineffective.

As I read those words, I had to ask myself why the big worry? Nobody with oversight authority has done anything so far to enforce the already in existence regulations and laws that govern credit and collections. I’m thinking 2009 won’t be horrific for the industry worker bees, it’ll be horrific for the average working stiff consumer.

Credit Card Charge-Offs And Housing Prices

Another article in this issue quotes Daniel Ludwig who is president and chief executive officer of debt broker National Loan Exchange, Inc. as saying newly charged-off credit card accounts are currently fetching about 7 cents on the dollar, on average. So I said to myself, if this is true of credit cards, I bet it is true of real estate as well. Not that real estate is selling for 7 cents on the dollar but it is selling at discounted prices and will continue to sell at discounted prices.

I took Mr. Ludwig’s remarks as reinforcement that great real estate deals are not only here but will be thrust upon us during 2009. You can say I’m stretching a point but in previous articles in the magazine the correlation to credit card debt and housing prices was laid out with clarity. I leave it to you to accept or reject this thought theology.

Finally, Darren Waggoner sums up John Q. Public’s sentiments by saying (s)he is bitter, bleak, scared, angry and on edge. Who can blame the public for being anyone of these, right? On the other hand, if you are a real estate investor, can you really afford to be any of these? I don’t think so. In fact, at least according to me, if you are happy, positive, open minded and have a plan, you should do very well in 2009.

Here’s wishing you and yours a very happy new year and huge success in your endeavors.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

A Look At 2009 From The Inside: Real Estate, Credit, and Debt

A couple of weeks ago I received a very unusual phone call. The caller stated that she was calling in reference to my XYZ Bank credit card and asked if I was Richard Warren. I have a credit card from XYZ Bank and assumed that the caller was soliciting me for some service even though I am on their internal “Do Not Call” list. When I confirmed my identity the caller took a decidedly different tone.

Her voice took on a menacing quality as she stated that she was with some firm and calling in reference to the XYZ Bank card ending in the numbers 1234. Since I don’t routinely keep card numbers in my head, I did not know off hand if this was my card number or not. I asked what the problem was and she quickly stated that I needed to bring the past due balance current immediately. When I stated that the card had a zero balance she reiterated that it did not and if I didn’t take immediate steps to pay I would be flogged, drawn and quartered, burned at the stake, keelhauled, and if that wasn’t enough they would sue me.

Still calm at this point, I stated that she obviously made a mistake and is talking to the wrong person. Even though I have a common name, she refused to believe it. She kept going on about the debt that I had to pay. I realized that she was following her training very well in that she was totally controlling the conversation and assuming that I was a lying deadbeat. Getting angry at this point, I asked “are you going to listen, or am I going to hang up?” Undeterred, she kept going on, so I hung up.

Identity Theft?

My initial concern was that I had been the victim of identity theft. I located that XYZ Bank card and checked the numbers. The last four were 5678, not the 1234 that the caller had stated. Just to be sure, I pulled a copy of my credit report and there was no credit card account bearing that number nor had there been any suspicious activity. I chalked it up to a case of mistaken identity and thought nothing more of it. Then the fun started.

The next day I came home to find a message on my machine. I was told to call 866-555-1234 regarding a personal matter of extreme importance. I knew immediately what the call was about. I also realized that I had received the same message a few days earlier but ignored it thinking it was a telemarketer calling even though I am in the Do Not Call Registry. I did not call and received a few more of the same messages. Finally they called when I was home.

Once again the caller would not allow me to get a word in edgewise and I hung up. I was ready the next time. When the call came I said “I want your name, your company name, address and phone number or I will hang up immediately.” This time I was able to get the information and said “thank you” and hung up.

Fighting Back

Using the company name and address I was able to get the main phone number and called that instead of the one the collector gave me. I asked to speak to a supervisor in their collection department. To my surprise I was connected to someone who sounded almost human. I explained what was going on and she asked me to hold while she pulled the case file. She came back on the line and asked me several non-invasive questions such as “did I ever live at the following address?”, “were the last four digits of my Social Security number 3456?”, “do I have an XYZ Bank card ending in 1234?” the answers were all no. She then agreed that it was a case of mistaken identity but it could take 24 hours to be removed from their automatic dialer system. Mercifully, the calls stopped.

Your Rights

The Fair Debt Collection Practices Act was created to protect consumers from unscrupulous collection agencies. Unfortunately many of the companies barely stay within the limits of these laws in attempting to collect a debt.

Some Basics
 Collectors may call only between 8am and 9pm                                
 May only discuss your debt with you or your attorney
 Must send written notice within 5 days after 1st contact
 Collector must stop calling if notified in writing to do so

There are many other rules that collectors must follow and they can be found on the Federal Trade Commission website. If the debt is legitimate you should talk to them about your situation in an effort to work things out. If the debt isn’t yours, you need to be persistent in your efforts to get the collection attempts to stop. Do not hesitate to go over the head of the collector and speak with a supervisor if necessary. The worst thing that you can do is ignore them.

Ask not for whom the bell tolls…it tolls for thee - John Donne

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

When The Bill Collector Calls

Today, we’ve got an important guest post to share, written by Dan Gilbert, Chairman of Quicken Loans.

Last week, President Bush signed into law the hotly debated financial rescue package called the Emergency Economic Stabilization Act of 2008. While this legislation helps stabilize Wall Street and the banking system, it does nothing to address the root problems of the housing dilemma that is at the core of the financial crisis. High foreclosures, adjusting ARMS, rapidly falling property values and an oversupply of housing have combined to form a housing market “death spiral”.

Frankly, the $700 billion government bailout isn’t enough to solve the downward spiraling housing market. The country needs more. The current legislation does nothing to address the homeowner. Our nation’s financial recovery must begin at home with the homeowner. Enacting measures that keep homeowners in their homes is the only real way to stem our financial crisis. That’s where A Solution That Works comes in. I’ll summarize the main points of the plan here, but I truly hope that readers will visit the site (www.asolutionthatworks.com) to read the entire plan and give your input, or check out the Choose Thinking blog. Then, if you agree with the solution, please share it with your friends and family, and your representatives in Congress. This is something that will benefit millions of people.

So, here are the main points you’ll want to know about A Solution That Works…

THE PROBLEM:

• At the core of the financial crisis is the housing crisis, which needs to be addressed.
• Stabilizing Wall Street and the banking system is only a start. The current bill does not forestall the tide of foreclosures that are to come.
• Adjusting ARMS, high foreclosures, low property values and an oversupply of housings have combined to form a “death spiral” in the housing market
• The $700B bailout does not address this. That plan (i) doesn’t address how prices will be set for the loans (ii) causes unfair results for borrowers who have dutifully made their payments (iii) is potentially extremely expensive for the taxpayers (iv) will take a long time to have an impact (v) doesn’t address the root cause of the messed up housing market

THERE IS A SOLUTION THAT:

1. Keeps homeowners in their homes with fixed affordable amortizing monthly payments
2. Costs the tax payers a fraction of the cost
3. Stabilizes prices and stops free fall in home values
4. Gives investors higher odds of recovering their investment in these loans/securities vs. expensive foreclosure and resale in declining spiral of housing market

HOW:

• Focus on specific types of loans, each of which must be owner occupied: (i) ARMS with no caps (ii) Option Arms (iii) interest only loans.
• Require servicers of these loans to reset the borrower’s rate to 6.375% fixed with a 30 year term/amortization. But the borrower only pays 4.875%; thus, government pays/subsidizes the difference between 6.375% and 4.875%.
• Over the ensuing 6 years, gradually raise the rate the borrower pays and lower the amount of the government subsidy until year 6, when the borrower pays a rate of 6.375% for the remaining term of the loan.
• The lender/servicer has a one-time chance to write off any negative equity and receive two times the normal write-off
• All prepayment penalties on these loans are voided
• Homeowners get the benefit of lower payment for the first 5 years, and then a low fixed rate for the next 25. They get to keep their homes. Their homes values (and neighborhoods) stabilize.
• Lenders are in a much better position than if they had to forecloses on these borrowers, and the stability this brings to the housing market helps them with their REO’s
• Taxpayers receive benefit because this costs an estimated $50B spread over 5 years– a fraction (1/14th) of the cost of the $700B plan

Under this plan, everyone benefits. Homeowners with troubled mortgage loans (ARMS, OARMS and Interest Only) have a lower payment for the first 5 years, and then a low fixed rate for the next 25. They get to keep their homes. Homeowners who have been responsible in their mortgage choices and payments also experience a more indirect, but no less valuable benefit as their homes’ values and neighborhoods stabilize and eventually appreciate. Lenders find themselves in a much better position as well.

Implemented correctly, this plan would help rapidly stabilize the housing market. It would significantly reduce foreclosures, stabilize home prices and allow millions of American homeowners to work their way out of “upside down” financial situations that continue to perpetuate our downward spiral. And at a fraction of the $700 billion dollar cost.

If you think this sounds like a proposal you could get behind, check out the site asolutionthatworks.com or head to the blog http://choosethinking.com/ for more details.

For more media coverage about A Solution That Works, check out this article in the Detroit Free Press or this interview with WJR Radio in Detroit .

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

A Solution That Works

It’s soooooo old news, isn’t it? I mean, all that stuff about people not being able to pay their mortgages and the rising population of those facing foreclosure, is so old hat now.

What is really important, after all, is the survival of big banks! At least, it would seem that way from the news coverage of the last few days.

Asia stocks drop, says one headline. Britain to unveil major bank rescue package, says another. The U.S. stock market drops for 2nd, 3rd, 4th, 5th………day . Another bank wants to buy another bank. The Feds want to rescue another lending institution…..on and on it goes.

This is the big stuff. This is what the world really is all about.

But notice what is getting lost in the discussions: the homeowner and what will happen to him.

It’s not like they are not linked. We keep being told, in fact, that the world’s credit crunch will only be resolved when the housing market returns to normal, whatever the hell that means?

Really?

Then how is it that pretty much nothing is being done along those lines?

The much rushed socialized bailout to rescue big banks went out of its way to not include any language that would allow bankruptcy courts to change the terms of mortgages, something many experts say is vital to help the housing market recover.

The housing legislation that was passed earlier this year to help distressed homeowners is hardly off the ground, because it has no way to force banks to re-negotiate mortgages. In fact, with the government now waiting to buy these bum loans from the banks, why should they re-negotiate anything with homeowners? And, in point of fact, for the most part, they are not.

Backers of the bailout say that by buying up bad mortgages and mortgage related investments, the government itself will be able to change the terms of mortgages that are on the verge of default.

But anyone who understands anything at all about this crisis knows that a large part of the problem is, most mortgages are no longer owned by the bank that issued them…each mortgage has been divided and divided again and spread across many different investments owned by many different institutions. How can the government do anything with these mortgages when it is all but impossible to find out who exactly owns them?

Further, it is this very uncertainty that is fueling the crisis of confidence that is leading the world down the road to economic ruin.

And yet, I have zero doubt that things will improve…and sooner rather than later. This is NOT the 1930s when the government not only failed to act (before FDR anyway) but felt no need to do anything.

Unlike in the 30s, even the smallest country understands this is a credit-driven world. The system will be fixed to make credit flow again simply because there is no other choice and everyone understands this to be true.

Still, the $700 billion bailout is not the best way to do this. AIG already has reportedly zipped through lots of the taxpayer money pledged only a week or so ago. This will not ease the credit crisis for sure.

Those who say the economy will not recover till the housing market does are correct. But then the game plan needs to be focused directly and clearly on achieving that goal and not on helping one bank buy another.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Global Economy Melts & Takes Focus Away From Foreclosure Debacle

In the financial crisis of today, to use a popular maxim of Donald Rumsfeld’s invention, “there are known unknowns and unknown unknowns.” Some major unknowns have surfaced to become economic hurricanes reeking havoc on financial markets worldwide, such as the failure of Freddie Mac and Fannie Mae. But what unknown unknowns are still lurking under the surface, waiting to be discovered, buried in the media headlines, that could have an equally devastating effect on the economy and real estate markets across the country? One such potential dangerous unknown unknown that hasn’t received very much press attention recently is the current lack of financial stability in the municipal bond market.

Municipal bonds are sold by cities and municipalities across the nation to fund large real estate and infrastructure construction projects. They offer investors a tax free stream of income and offered by brokers around the nation as a low risk way to receive income without increasing the investor’s tax burden. Well, it turns out that the municipal bond markets now are starting to sound like a familiar story. Municipalities across the nation have taken advantage of low interest rates over the past two years to fund construction projects. However, about a one third of these funds were borrowed using a variable rate of interest. Now the municipalities are having trouble paying back their investors. Does that sound familiar? In fact, according to Joe Mysak of Bloomberg.com, “for all of 2007, something like $300 million in municipal bonds defaulted, according to the Distressed Debt Securities newsletter of Miami Lakes, Florida. So far this year, the figure is more than five times that, and climbing.”

To cite one specific example of how municipalities spend their borrowed money, Mr. Mysak describes how many cities over the past few years have borrowed billions of dollars to build and develop downtown convention centers. The hope was that the influx of the visitor’s spending money would fill city’s coffers with enough tax revenue to repay the loans. “How likely is that? Do you think American businesses are going to send their employees on a binge of convention-going in the next year or two? What happens to all this space and the billions of dollars in bonds that were used to build it?” Mysak sadly quips.

One great known in all of the financial problems that have beset the US economy is the fact that there are many more unknown unknowns that will simply become unknowns as the weeks and months grind on.

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Are Municipal Bonds the Next Big Unknown Unknown?

The credit markets have been so frozen that the Government felt that they had to step in with the recently enacted $700 Billion bailout. The freeze that started with subprime mortgage loans had spread to prime mortgages, auto loans, credit cards and other consumer loans. The entire economy was teetering on the brink of collapse. This situation was so serious that they felt compelled to act a mere five weeks before a major election. This bailout is going to fix all of that, right? Wrong!

The idea of the bailout is to help large lenders and investment firms in danger of being crushed by the weight of the bad loans on their books. The fear is that there would be a domino effect throughout the economy that would cause it to come to a screeching halt. As these companies are relieved of the burden they would, in theory, be able to lend again. The initial benefit of the bailout legislation will be felt by these large institutions. The hope is that the benefit will trickle down in time and the economy will improve. The key phrase here is “in time,” this is not an instant solution.

What’s An Investor To Do?

Real estate investors need to get creative. The days of easy credit and no money down loans are gone for good. The so-called “liar loans” are as extinct as the dinosaurs and investors will actually have to (gasp) qualify for the loans they want. In terms of the long-term health of the real estate market, this is a good thing.

Investors who are challenged with poor credit or lack cash for down payments will have to look for alternatives. They will need to seek out sellers willing to provide financing, find money and credit partners and learn to acquire property subject-to the existing financing. All of this was done before the housing bubble and easy credit days and it can be done again.

What’s A Consumer To Do?

The primary thing that a consumer needs to do is forgo the need for instant gratification. The recent economic expansion was fueled, primarily, by credit. The bill has certainly come due. If you want something you should do the unthinkable: save for it. So many people are burdened by debt that they acquired to buy things that they could have done without. It’s time to pay as you go and stop maxing out the plastic.

If people learn a lesson from all of this we may actually come out ahead. It’s time to stop spending money that we do not have. This is also true of our Government, the wasteful spending and pork has to stop. We can’t keep throwing money away, we need to establish priorities and stick to them. We’ve had tough times before and we have managed to get through them and I believe that we will get through this as well. Will it be easy? Absolutely not.

The government solution to a problem is usually as bad as the problem.
Milton Friedman

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Skating On A Frozen (Credit) Pond