I came across a research paper published by the Boston Federal Reserve Bank where the researchers looked into among other things a mathematical formula that demonstrates subprime lender have little financial motivation to modify mortgages facing default.

This research I thought was interesting because I am caught between wanting the government or the lenders to “help” foreclosure victims, especially if they were tricked or lied to (a typical practice among subprime mortgage sellers). Of course, everyone on the planet knows best how to accomplish this “helping”. I on the other hand don’t. Nor do I have the arrogance or stupidity to believe just throwing money at defaulted homeowners will work any better than burying the banks in mountains of cash thawed a “frozen” credit market.

So are we stuck with the alternative…do nothing?

Maybe that is the best answer. Do nothing and let the real estate market absorb all the foreclose homes at depressed prices. This will eventually mean a bottom in home price gets hit or what economists call an “equilibrium”. The theory goes this will happen anyway and the only thing the Feds or lenders can do with too much “help” is slow down the inevitable. If that’s true, well-meaning “help” turns out to be “hindrance”. Not good…

I don’t know…this “free market equilibrium” rationale sounds very self-serving for the banking and mortgage servicing industries. Am I biased against it just because it aligns with the wants of an obviously crooked couple of industries?

Probably…

When I get caught in a “bias debate” with myself it can go on forever, so I seek out facts and figures to make the differences. Enter this new report…

Subprime Mortgages, Foreclosures, and Urban Neighborhoods – Authors: Kristopher S. Gerardi and Paul S. Willen

In the report, I found a few nuggets of gold to help me break the logjam.

First, the reason for the subprime lenders do NOT want to help is the fact that according to fairly simple “risk vs. reward” calculation, lenders know that most underwater borrowers will in fact pay!

Did you get that?

The worst hurt by this subprime meltdown, the lowly subprime borrower…those horrible folks who “took advantage”…even after losing a ton of equity…those folks will find a way to pay. Under this scenario the banks lose nothing…so why modify a loan with a costly principal or rate reduction.

We all forget to ask for the numbers in a fervor to “act” or “help”. In the case of subprime borrowers, the numbers show most will pay even when you or I might walk away.

Here’s a chart …

The chart shows even with a negative equity of 20% a prime and subprime borrowers’ chances of foreclosure are 4 and 33 percent respectively. Yes, subprime borrowers will default at a much higher rate than prime borrowers, but we should still remember if 33% default, that leaves 67% who don’t. That reflects a majority who don’t default under the same conditions.

A quote from the report,

“Specifically, many commentators have recently argued that lenders should eliminate negative equity for borrowers in such a position by writing down a portion of the principal balance on their loans. The argument runs that such a plan benefits the lender as well as the borrower because the new principal balance exceeds the yield from foreclosure, once one takes into account the costs of foreclosure. Many commentators have argued that this solution is so obvious that one wonders why lenders do not implement it on a large scale. In the following discussion we show why lenders have not engaged in such a policy as a matter of course, but we also argue that for multi-family properties in the inner city, such a scheme
might work.

There is a serious flaw in the logic of principal reduction. To see why, it is useful to think of two mistakes a lender could make. One mistake is to not offer assistance to a borrower in distress. The lender loses here if the increased probability of foreclosure and the high costs incurred by foreclosure make inaction more costly than assistance. We call this scenario “Type I Error.” But there is another mistake, often overlooked, which is to assist a borrower who does not need the help. The lender loses here because it receives less
in repayment from a borrower who would otherwise have paid off the mortgage in full. We refer to this case as “Type II Error.”

Type II error is precisely the reason that lenders rarely engage in principal reduction. One lender summed it up this way, “We are wary of the consequences of being known as a bank that forgives principal…we have not to date forgiven any principal.” Some have suggested that principal reduction would benefit investors, but that complex agreements between servicers and investors make such a policy infeasible. However, the evidence for this explanation is severely lacking. For example, Freddie Mac, which retains credit risk when it securitizers a mortgage, and thus has complete discretion over the disposition of troubled loans, rarely grants any loan modifications. Furthermore, for the instances in which it does offer assistance, few involve any “concessions” like principal or interest rate reductions.”

Why don’t we have more meaningful foreclosure asistance…prinicpal and/or rate reductions? Because lender’s …”are wary of the consequences of being known as a bank that forgives principal…”.

But is this because the banks are simply horrible, evil people with no compassion…or is it due to some macro-economic theory of hitting bottom unimpeded?

Nope…on both accounts!

The real interesting part of the study comes when the algorithm gives both types of credit borrowers back a 10% percent equity stake in the home and recalculates the foreclosure probability and the “Net Gain” between Type I and Type II Errors.

Looking at this we see the probability of foreclosure on the prime borrowers barely move but on the subprime borrower it drops considerably…from 33% down to 9%. One the surface, you’d think that would support the idea lenders and policy makers could benefit from a “principal reduction” strategy.

But wait…

We still have a negative net gain number even after simulating a principal reduction for all home-owner borrowers. The authors define the chart this way…

Type I error measures the cost of not assisting borrowers who need help. Type II error measures the cost of assisting borrowers who do not need help. The net gain to the lender, as shown in Section 6, equals the difference between Type I and Type II error.

So the researchers factored in the cost of the “accidental helping” of those who didn’t need it…which does occur when you do en mass loan modification ala Sheila Blair’s method. With this factored in, the subprime borrower now shows a negative “Net Gain” of -12.7%. The bank loses money even after reducing the principal amount…a no-win situation.

Combine this fact with the fact that 67% of subprime home-owner borrowers were going to pay in full without any help whatsoever, we get a reluctant banking industry when it comes to principal reduction loan mods.

It appears to me it’s a double standard for us to ask the banks to “help” subprime foreclosure victims in a way that loses them money. At the same time, preaching “Be smarter next time”. They are just trying to ‘be smart’ right now.

Of course, it really won’t matter because Congress and other politicians are already geared up to spend about $100 billion at last check to “help foreclosure victims”. I feel I can now say with certainty, no scheme of “helping” homeowners with principal “cram downs” or government investing in the “underwater” portion of their home will solve a thing.

I say this with equal parts relief that the debate is over…and overwhelming sadness the only logical conclusion means, in this case, “help” turns into hindrance.

I really wanted it to go the other way….

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

Fed Research Sheds Light On Reluctance Of Subprime Lenders To Modify Loans

Ho! Ho! Ho! boys and girls (and real estate investors) — it’s that time of year again–Christmas –when the holiday spirit is in the air. Jingle those bells! You know you want to. But, there is a slight problem this Yule time season (well, okay, a big problem) that just may dampen your good cheer.

Santa is facing foreclosure!

I know, this has not been widely reported in the news because, frankly, Santa thinks it’s none of your freaking business . . . but, the mortgage on his North Pole residence is about to go South since it was financed with one of those subprime loans we keep hearing about.

I know, you are asking yourself, why did Santa need a subprime loan? Well, come on, if you only have a job that requires you to work one night a year, don’t you think it might be hard to get a bank to give you a regular mortgage?

Now, don’t get me wrong . . . Santa is no deadbeat . . . a little too fat, maybe, but no deadbeat. The problem is the subprime mess that led to the credit crunch has led to fewer people buying toys for their tots this Christmas. This is impacting Santa in a BIG way. He’s almost doing as badly as FedEx.

Santa Learns From Fannie, Freddie, the Banks & Big 3 Autos

Santa was heartened at first by the federal takeover of Fannie and Freddie. But the sad fact is, it’s done zero for him. His elves are being laid off. His reindeer have taken to crystal meth to cope. And Mrs. Claus is moving to Miami cause she can’t take living in the North Pole now that the heat has been turned off.

Last week, Santa did try one last thing. He secretly went before a Congressional committee to ask for a small loan–something like $4 or $5 trillion dollars, I think (come on, overhead is high at the Pole).

Congress is thinking of giving Santa a loan in exchange for strict controls over the elves and his promise to develop a more fuel efficient fleet of reindeer.

Santa is sort of okay with this…he actually can’t stand the elves anyway…they are so—well—height challenged!

The fact is, if Santa doesn’t get the dough, he will default on his mortgage payment and probably have to give up his abode and workshop.

Santa is not exactly in a holiday spirit, boys and girls (and real estate investors) — Truth is, he’s a bit drunk right now. Not to worry. He’s a pro and he will be fine when the time comes.

Just please keep this in mind–when Santa comes down your chimney–he will be in a foul mood. Whatever you do, don’t talk to him, look at him or question the toys he’s brought your kids. Santa is believed to be armed and could be dangerous considering his mental state.

So, have a merry Christmas . . . keep the faith…believe in miracles and send Santa a few bucks because he’s too fat to fail!

BREAKING: BiggerPockets Conducts Follow-Up Interview With Santa!

Check out the interview

Photo Credit: Homeless Santa by azrainman

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

Santa Faces Foreclosure; Victim Of Subprime Debacle; Seeks Christmas Government Bailout

I call the Bernanke – Paulson twosome the Dynamic Duo because what they devise to solve our financial crisis is no more ridiculous than the far-fetched ways Batman and Robin used to escape sure death in the campy TV show. Unlike the TV show, I’ve stopped rooting for this financially bungling Dynamic Duo to succeed.

They don’t deserve to succeed…and I’ll prove it.

Dynamic Duo At It Again

Their latest “brainstorm” was to float a story about “putting a floor under home prices by driving conventional mortgage rates to 4.5%”. This would ostensibly be accomplished in the FNMA/FHLMC MBS market place where Hank and Ben could use their freshly printed $$ Billions to buy up the MBSs like no tomorrow. As we all know, increasing demand drives up the prices and down the yield (read rate) so mortgage rates drop from say 5.5% where they were before the story leaked to around 4.5%.

It is believed by the Dynamic Duo this lowering of prime mortgage money would increase demand for housing and home prices would stabilize.

Housing Crisis Solved…Right?

Wrong!

First, it won’t work. Ben and Hank forget the prime credit folks were not the problem…and by definition then cannot be the solution.

That’s what makes the “subprime mortgage” crisis a crisis of the new species called “subprime”. Once you introduce a “new species” into the eco-system…if things go wrong, tweaking the old players in the system won’t help. You have to eradicate the new addition and hope the old players can recover once the threat is gone.

This is the same thing. The subprime players increased demand for housing and drove prices sky-high. Those players need expunging for real estate price to stabilize. Foreclosure gets rid of most of them and sadly, the sooner the better.

Secondly, this plan could actually backfire. As I’ve written before, we are in not so much a financial crisis as a CONFIDENCE crisis. If these two technocrat idiots try this and nobody steps up to buy a house….say “bye, bye” to what remaining confidence Americans have in their financial markets and those running them.

Don’t laugh…this could happen. After all Hank said once he gave the nine mega-banks $250 Billion a few weeks back, they’d start lending to each other unfreezing the credit markets. Those banks got the money and either sat on it or used to pay executive bonus packages.

Oh, Hank…you’re such a sucker!

Anyway Possible To NOT Help Homeowners

Lastly, this is just another in a long string of end-arounds so as to NOT directly give any money or relief to struggling home owners. There is a small percentage of “savable” foreclosure victims who can afford their home if they get a temporary restructuring of their loan. Paulson and Bernanke won’t consider for a second any proposal which gives them any help.

Every time Barney Frank or another member of Congress yelps there should be some relief for home owners, these two guys head for the door.

Now, I know I just said the “subprime threat to the eco-system needs eradicating” or whatever, and this sounds like a contradiction. It’s not. I’m not talking about those subprime folks…subprime borrowers are all but gone.

What is left is that small percentage of borrowers who were not “turned into a home buyer” due to lax credit standards, but simply got roped into the wrong loan. This group needs and deserves our help, but thanks to the Dynamic Duo will never get our help.

Saving this small worthy group would do a lot to jump-start the recovery of the eco-system. It would also go a long way toward restoring confidence. Confidence that even if those in charge of the system don’t always know exactly how to fix things…they, at least, care.

These two over-privileged mega-jerks…don’t care…and we all know it. Their fate is not ours. We will all come out of this, but they don’t deserve to succeed because of this fact alone.

I’ll see you all on the other side of this…

…but I’m afraid this is “curtains” in my eyes for this Dynamic Duo.

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

The Latest Dynamic Duo Disaster In The Making

The scuttlebutt amongst conservatives since the beginning of the subprime mortgage mess has been that the Community Reinvestment Act (conveniently expanded during the Clinton years) was the source of the troubles in the capital markets. Being a housing economist with a fiscally conservative disposition (although not a registered republican or democrat) I always found this hard to swallow. Particularly because having been in the mortgage finance arena for over a decade, I knew intimately how the secondary market worked. Subprime mortgages are not purchased by Fannie Mae and Freddie Mac–although they DO have an expanded approval program that could be considered “subprime”. Now, admittedly the world of mortgage backed securities, collateralized debt obligations and credit default swaps is highly convoluted. Exactly where certain traunches are housed can be very difficult to untangle. But just looking at my company’s own numbers, we never had a statistically significant difference between default rates on our “low income” mortgages and our “prime” mortgages.

Turns out, that hunch proved to be right. Yesterday, John C. Dugan–the comptroller of the currency appointed by President Bush (hardly a patsy for the dems) released a statement that categorically disagrees with the argument that the CRA is at least partly to blame for the ongoing credit crisis. In fact, during  the second quarter of 2008 loans offered in partnership with NeighborWorks Organizations actually have a lower default rate than even conventional conforming mortgages. “Foreclosure rates within the NeighborWorks network were just 0.21 percent in the second quarter of this year, compared to 4.26 percent of subprime loans and 0.61 percent for conventional conforming mortgages,” said Dugan.

The fact of the matter is that affordable housing is a good thing. It helps lift communities all over America and for real estate investors who ethically focus on Section 8 properties, affordable housing multifamily developments and low income housing, it can be quite profitable. Many of my own clients are some of the most successful residential and commercial real estate investors in the world. Almost without exception, they all have at least a portion of their real estate portfolio allocated towards affordable housing. Programs like the CRA are a wonderful example of public-private partnerships.

Photo Credit: George the Geek

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

Community Reinvestment Act NOT Source of Subprime Mess

Bond insurers are virtually never discussed as a pivotal and responsible party in the subprime mortgage meltdown. Companies like Ambac and MBIA this week used a new accounting rule to post deceptive earnings gains after multiple quarters of multi-million dollar loses. The duplicity of the bond insurers in earnings reports and the over-all “asleep at the wheel” subprime insurance they issued deserves an airing out…so here goes.

Wall Street knew they’d need a form of insurance to entice pension funds, foreign banks, and other investors to buy the subprime mortgage backed securities they created called CDOs or collateralized debt obligations. A CDO is a form of bond and therefore the bond insurance companies would need to be recruited to complete Wall Street’s high risk scheme to help make CDO investment look less risky.

Was Wall Street trying to pull a fast one on the bond insurers?

Sure, but that’s to be expected. Bond insurers job is to ferret out the bad bets and only lend their stamp of approval to investments that pass muster.

But before we continue let’s look at bond insurers in general. This is a bond insurers business model…insure investors against loss – both principal and interest. Bond insurers typically make their money from truly low risk state and municipal bond insurance. Rarely do those types of bonds default, so the insurance a company issues to cover any losses to investors rarely needs a claim paid.

However, when Wall Street came calling on subprime CDOs, the bond insurers got blinded by their greed seeing a whole new, much more profitable market. They used their AAA rating to issue insurance on obviously risky financial instruments knowing full well if defaults mounted they’d be on the hook for both principal and interest payments to the investors.

Wall Street could now sell billions in subprime CDOs with the bond insurers on board.

If the bond insurers had simply said, “No, we won’t rubber stamp your crappy subprime mrotgage CDOs ruining our name, our balance sheet, and our AAA rating just so you can fleece investors around the globe.”…there would have been no subprime secondary market.

No subprime secondary market…no subprime mortgage meltdown…no subprime mortgage meltdown…no real estate bust…or so the story goes.

If the bond insurers had done even the least amount of “common sense underwriting” of the risk these subprime CDOs held the country could have avoided the creation of the subprime secondary market and the subsequent destruction of said market taking the economy with it. The bond insurers were our last line of defense…and they went AWOL when we needed them most.

With Ambac and MBIA back in the headlines, I thought you should know these type of companies are back playing games with numbers. This time instead of turning a blind-eye to risks, they are using newly passed accounting rules which magically allow them to show earnings gains (at least on paper) where none existed before.

Whether bond insurers are deceiving subprime mortgage CDO investors or their own stockholders, they seem to have no problem acting immorally. With morally indifferent companies having such a powerful position in our financial markets, a better case for a complete overhaul in regulation can’t be found.

Maybe Congress could spend a little more time focusing on regulating the bond insurers and a little less time passing so many forms of new regulation on mortgage brokers most of them will go out of business trying to comply.

Right…who am I kidding?

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

Bond Insurers – The Hidden Conspirators of the Mortgage Meltdown

Yesterday in a special session the Senate passed the Housing Economic Recovery Act of 2008, H.R. 3221, with a 72 to 13 vote. This measure received such overwhelming bipartisan support so politicians could point to this legislation and say, “We are doing something to mitigate the foreclosure crisis”.

They aren’t.

This bill once converted to law with President Bush’s signature next week can’t and won’t do a thing to stem the drop in home prices which is what home owners and landlords need desperately. But with over 1.5 million households in foreclosure and elections in November, politicians did what politicians usually do…too little, too late.

I found the perfect quote to describe this new bill…

“Politics is the art of looking for trouble, finding it, misdiagnosing it and then misapplying the wrong remedies.” – Groucho Marx

Grouch had H.R. 3221 in mind when he made that statement. This bill is nothing more of a blank check to the Treasury Department to bail out the GSEs, Fannie Mae and Freddie Mac. Sure the Democrats slipped in a $5 Billion measure allowing states to buy and repair foreclosure properties. However, you and I both know this money will never reach the market in time and it’s a drop in the bucket anyway.

Paulson pushed hard for this legislation for the last 2 weeks telling every Congressman who would listen how our national credit worthiness with the world was at stake…our honor no less. It just goes to show how ill-equipped Congressmen are to spot a conman in action. Since when does bailing out two of the most profitable NYSE traded companies in recent history a national priority?

Paulson now has the power to grant unlimited credit to the GSEs and the power to buy their stock directly. This over-reaching power has never been given to the Treasury. The GSEs, especially Fannie Mae, are known for accounting scandals, huge campaign contributions to Congress, and multi-million dollar incentive-based compensation packages for top executives.

This is how we want to spend tax payer money?

Wall Street firms can’t seem to determine the extent of the subprime damage in their own portfolios, so how is Paulson going to it at the GSEs? The bad loans buried in the mountain of GSE owned debt – over $5 Trillion – could easily be well over $100 Billion at Fannie Mae alone.

My guess is this new law will cost the tax payers over the next few years about $200 Billion and not one dime will stop the slide in home values. Not one dime will go to help a family save their home from foreclosure which would help stabilize home prices.

Groucho…when you’re right, your right.

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

New Housing Bill Will Not Stabalize Home Prices

Last week I opened my big mouth and said I’d present another solution to the foreclosure problem we are facing today. Before I do, I happened across this law:

“every insolvency of a bank shall be deemed fraudulent, and the president and directors shall be severally punished by imprisonment and labor in the penitentiary . . . provided that the defendant . . . may repel the presumption of fraud by showing that the affairs of the bank have been fairly and legally administered, and generally with the same care and diligence, that agents receiving a commission for their services are required and bound by law to observe. . . .”

as I was researching information on bills of credit. I thought a few of you might like to see that law on the books today. I know I would. I bet the CEOs of IndyMac Bank, Countrywide, Freddie Mac, Fannie Mae and a few others would have done business a bit differently if this law actually existed and was enforced.

By the way, it did exist as Section 28, Art. XX, of the Georgia Banking Act [State Banking Act of 1919 (Acts Ga.1919, p. 219)]. I say did in the past tense because as you might guess, it has been watered down over the years by the courts. Today defaults and insolvencies are blamed on the borrowers and especially the sub prime borrowers.

But that is a different tale and I’m not marching down that avenue today. I posted the above because I thought you would like to see what life used to be like for irresponsible banksters.

Here is what life is like now for irresponsible banksters. It is a snippet from an online AP story of July 14, 2008:

Brian Bethune, chief U.S. financial economist at Global Insight, called the troubles at Fannie and Freddie a “potentially dangerous turn of events” for the U.S. economy. He said they needed to be addressed quickly with an infusion from the government — read “taxpayers” — of as much as $20 billion in new capital for both institutions.

Notice who the goat is in the second paragraph. You and me, laughingly called the taxpayer. The jokesters running these two scams draw not only their paychecks but bonuses. Every year they go before Congress and weep and whine about how tough they have it and Congress keeps letting them run barefoot through the treasury.

My solution for today is to have the U.S. Marshals do to the banksters what they do to organized crime bosses. Haul them away in handcuffs. I’m not totally heartless. I’d give them $300 to put on their books in the joint. That way they can at least visit the commissary once a month.

I don’t believe it will ever happen because it appears all of the marshals, US attorneys and the like are really cloned Mike Nifongs. But, I can still hope it will happen.

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

Commentary: How to Really Handle the Foreclosure Problem

By all accounts it seems the banking lobby will get everything they’ve been ask for from Congress over the past decade and in do so may legislate mortgage brokers out of existence.

A little history lesson is in order to understand all the political and media spin designed to sway their and public opinion away from mortgage brokers the banking industry orchestrated for the last 10 plus years.

During the 70′s and early 80′s, banks dominated originations carving out a whopping 80% of the retail loan applications. Brokers quickly picked up the slack and by the early 90′s the numbers reversed. The market, especially real estate investors, liked the idea of a personal mortgage broker who understood their goals scouring the landscape for the best products and rates.

Banks have never been know for the best customer service or pricing and the public punished them by fleeing to the broker community. During this time brokers enjoyed about 75% of all originations leaving the crumbs for the banks.

They didn’t take that lying down. The quickly got their lobbyists working on legislation that passed in 1999 to poison the market against broker by demanding brokers show their “yield spread premium” income while the banks were allowed to hide their own. The thought was the public upon seeing this often times enormous “profit” that was heretofore hidden would put brokers in a bad light with consumers and they would come running back to the banks.

It didn’t happen.

As it turns out consumer either didn’t know or didn’t care. Some critics ( myself included) would say the brokers decided one “dirty trick” deserved another and devised ways of obfuscating the YSP. After all banks were getting away with setting up an un-level playing field in the first place so they could claim they were just “evening the score”.

Undaunted in their pursuit of the killing off their competition, many believe the banks decided upon a “scorched earth” plan to rid themselves of retail mortgage competition once and for all.

The Plan was one they pulled from the S&L playbook a decade earlier. Give the mortgage brokers just enough rope to hang themselves just like the Savings and Loans did.

Remember the Savings and Loan crisis of the late 80′s?

Banks wanted the S&L’s out of the way back then too. When a few greedy large S&L’s decided they wanted “deregulation” so they could make commercial loans it was the banking lobby who helped them get it.

At the time it seemed like “strange bedfellows”, but it only took a few years to see the banking industry genius behind their “assistance. They knew the S&L’s were unprepared to thwart their own greed and would create a “banking and real estate crash” lawmakers and the public would rightfully lay at their doorstep.

All the banks had to do this time around was find an equally stupid idea, attach a lot of money to it, and let the brokers commit a little “banker-assisted” suicide.

Enter the subprime loan.

Bankers priced them, marketed them, and feed them to a stupid, greedy bunch who cobbled them down with out the knowledge they’d just been had.

It worked.

Lawmakers and the public are clearly laying the current real estate and banking debacle at the doorstep of mortgage brokers. Legislation will pass making mortgage brokers all but extinct.

It worked so well that the banks may have succeeded in taking down not only the brokers but the mechanism that put them in business in the first place…the GSEs…Fannie Mae and Freddie Mac.

On Friday there were cries to bailout the GSEs since they too got caught in the bankers web of greed. The infection of subprime losses it seems put both GSEs on tilt. With them out of the way, the broker have no hope of staging a comeback since it’s Fannie and Freddie’s pathway to the money markets that give brokers something to sell.

The banker planted subprime virus not only killed brokers and the GSEs, but will likely kill the real estate industry and economy for the next few years too.

But when the dust settles a few years from now, every one will go to a bank to get a mortgage because that is all that is left.

Mission Accomplished!

If investors thought getting a loan was hard before, just wait. You ain’t seen nothin’ yet.

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

Are Mortgage Brokers An Endangered Species?

How about some good news for a change about real estate, mortgages, credit, jobs, consumer confidence, Wall Street stability, the future of civilization as we know it?

Sorry, not gonna get it here.

Evidence is evidence and though some may like to engage in wishful thinking, the evidence is not good at all.

Goldman Sachs is actually forecasting that credit losses around the world caused by the current near panic in financial markets will hit some $1.2 TRILLION!!!!!

The same report predicts that U.S. banks, brokers,hedge funds, etc., stand to lose around $460 BILLION in credit losses.

SCARED CONSUMERS

Very scared, in fact. Consumer confidence has hit a five year low; people are nervous about their jobs, their homes, their credit, their lives.

But one example of why the worry: From January 2007 to January 2008, the price of existing single-family homes dropped some 11 percent.

And then, there’s

Bear Stearns

Yeah, JPMorgan Chase upped its bid increasing the value of Bear Stearns, but the new offer still remains some 88 percent below what the stock was worth only one month ago, according to a Reuters report.

Was all of this mess really caused by subprime mortgages?

Well, yes and mostly no.

Yes, in that the subprimes certaintly pulled the trigger on this now global credit crunch.
No, in that the ammunition was stocked by various lending institutions and brokerage firms, all motivated by nothing but pure greed. They rammed these mortgages down the throats of people who wanted to own homes but really couldn’t afford them, and now they are being vomitted back up.

The subprime mortgages were bundled into investments that no one really understood or understands to this day..including officials at the Federal Reserve.

As some have pointed out, in recent years, this country has developed a sort of shadow banking system, one immune from the post-Depression era restrictions slapped on commercial banking institutions to maintain some form of economic stabilty.

It is this shadow banking system that is what is behind this terrible mess. And, the trouble is, much of it remains in the shadows which is why people are running scared.

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

Consumers Worried; Home Prices Down; Trillions in Losses; Any Good News? Well…

This week has been an extremely volatile one in the world of real estate and the economy. We’ve seen Gold at $1,000 an ounce, a collapsing dollar, oil skyrocketing, an much more. Of everything that has happened, probably the most shocking is what came out of the Fed this week . . .

According to the The Daily Telegraph, “The US Federal Reserve has taken the boldest action since the 1930s, accepting $200bn of housing debt as collateral to prevent an implosion of the mortgage finance industry and head off a full-blown economic crisis.” Tim Bond, a strategist at Barclays Capital remarked, “The market was starting to question the solvency of bodies that stand at the top of the credit pile. These agencies together wrap or insure $6 trillion of mortgages. They cannot be allowed to fail because it would cause a financial disaster. The fact that this sector has blown up has caught everybody’s attention in Washington”

At Least President Bush is Confident in the Economy!

It seems like everybody but the President, who continued to dodge questions about the economy until a press conference today where he expressed his “confidence” in the US economy. I’m glad that he is confident, but he’s doing little to stem the collapse of the dollar and the looming current recession.

To make matters worse, suffering investment bank Bear Stearns today was given a bailout by J.P. Morgan Chase and the Federal Reserve Bank of New York. From the Wall Street Journal:

The intervention by J.P. Morgan and the New York Fed shows Bear “didn’t have enough money to turn the lights on this morning,” said Carl Lantz, strategist at Credit Suisse. “And in a big picture sense, this isn’t that comforting.”

This news turned a somewhat positive market (inflation report wasn’t as bad as expected) upside down once again, and at the time of publishing this post, the Dow is down 300 points and Bear Stearns is off 40%.

Talk about an economy we should be Confident in!

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

Are They Serious? Fed Takes Mortgage Debt as Collateral, Bear Stearns Gets Bailout, and President Bush is Confident in the Economy!

If someone were to have said, say a year ago, that there would be a crisis in the subprime mortgage market that would lead to world-wide economic chaos, that person would no doubt have been laughed at.

Sadly, though, that is exactly what has happened and the evidence just this week is overwhelming.

But, before the depressing news, how about a little uplifting news? You know you want it!

The Fed To The Rescue: Too Little Too Late?

The Federal Reserve has come up with a “rescue” plan that, as the Associated Press put it, “would pour as much as $200 billion into banks and investment houses and allow them to put up risky home-loan packages as collateral.”

Why does this matter?

Because the mortgage crisis induced credit collapse has made banks and other lending institutions not want to lend money to one another. And, in the end, that means they don’t want to lend money to you.

Under this plan, financial institutions can borrow from the Fed, and, in effect, exchange their questionable mortgage-backed securities for a sure thing: U.S. Treasury securities.

In theory, this should trickle down and make banks and others more likely to extend credit to all of us…and that includes new mortgages, which could help take some of those now empty foreclosed houses off the market.

Is this enough?

Says Ian Shepherdson, chief economist at High Frequency Economics, “This will not turn the economy around or fix all the problems in the markets but it should reduce the liquidity issue, at least for now,” according to the A.P.

Hold On. Here Comes The Promised Depressing News

Told you we’d get to this. If you are the weak knee type, you may want to stop reading right here and make yourself a cup of coffee…even though world coffee prices have jumped more than 20 percent in the past year.

But, if you are strong, read on and keep a tissue nearby. Better yet, keep a box of tissues nearby . . . although paper prices, too, have risen.

$6.1 billion dollars is how much Fannie Mae and Freddie Mac lost in the fourth quarter and they think they will suffer billions of dollars more in loses as we crawl through 2008.

The price of gas has gone up as of this writing to a new national record–$3.2272 a gallon, on average. And, in places such as Southern California, it costs even more. We’ve already seen some service stations charging $4 a gallon for regular gasoline.

In large measure, gas prices are now rising–they did lag a bit–because the price of light sweet crude oil keeps setting new records just about every day. It was trading at $109.72 at one point today (Tuesday) in the New York Mercantile Exchange.

120? Did I Hear 120? 120, Going Once, Going Twice, Sold To The Suckers Around the world.

That’s right, there are now serious projections that oil could rise to $120 a barrel.
And, ready for this? Maybe even higher??

Because U.S. dollars are so much cheaper now against many currencies, partly because of what began as a subprime mortgage crisis, and partly because of the ever expanding economies of China and India, the U.S. trade deficit in January rocketed to $58.2 billion from $57.9 billion the month before–this according to a Commerce Department report issued today.

Talking about China, and I was, our trade deficit with that country also got a lot bigger and is now $20.3 billion as of January. It was $18.8 billion in December 2007.

Even Google?

Yes, even Google, which pretty much owns the entire planet by now, is talking about possible layoffs soon! I mean, Google? You’d think they’d be able to Google for a solution to their problem, right?

I know what you are thinking. You’re thinking, yeah, this is pretty depressing stuff, but, boy, what about that stock market Tuesday which had its biggest one day rally in some six years, the Dow Jones industrials up 416.66 points!

Come on. We’re all adults here, right? Nice that the market went up so much on one day, but does anyone really think this will start a trend, what with all the bad and uncertain economic news out there? Shame on you if your answer is yes. Hate to introduce some more doom and gloom to this otherwise upbeat last few paragraphs, but you know the market is going to plunge again and probably lose whatever it gained in trading today. Of course you know it!

Like I said, if someone would have said a year ago that a subprime mortgage crisis would ignite all of this—-well, come to think of it, if someone had, that someone should have been made Secretary of the Treasury or even President. But, that’s a whole other story.

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

Real Estate Crisis Worsens and Takes the Rest of the Economy Down with it!

It is amazing, by any standards, just how bad things have gotten on the economic front because of what was, at first, a crisis in the subprime mortgage market.

Of course, conditions had to be right (or wrong, in this case) for the subprime match to ignite such an enormous world-wide blaze, but, it has, and the figures out just this week prove that to be the case.

Yes, there are areas of the U.S.–mostly smaller metro areas–where the real estate market is not that bleak—-yet! But, if you look hard at the facts and figures to follow, you will have no option but to come to the conclusion that even these areas will soon feel the fury of a global, U.S. caused, economic meltdown.

Ready?

Here goes.

From bad to real bad

A national home price index just released shows a record collapse in home prices for the last quarter of 2007–down 8.9 percent. This is the largest drop in the entire 20 year history, says Reuters, of the S&P/Case -Shiller U.S. National Home Price Index.

“The composite index of 10 of the largest metropolitan areas fell 2.3 percent in December versus November and tumbled 9.8 percent year-over-year, which set a new record.”

17 of the largest 20 metro areas posted annual declines–while the remaining three showed either flat or moderate growth.

In case you are wondering, Miami is the worst—home prices there crashing at an annual rate of 17.5 percent!

We’re not through, yet!

No wonder that Consumer confidence has gone down the toilet, too. (Presumably a toilet in a home whose value has dropped!)

The Conference Board in New York reports consumer confidence has gone down “significantly,” says an Associated Press dispatch.

The Board found the lowest reading on its index since 2003 and tells how consumers are feeling about the state of the American economy. No surprise that they don’t feel all that good right about now.

Now, ready for some REALLY bad news? Of course you are.

Inflation is back! Big time, too.

Inflation at the wholesale level climbed last month…and that means the annual inflation rate took its fastest leap in some 25 years!

Rising food, energy and medical costs mostly to blame here.

Last month, the Labor Department says, wholesale prices went up a full percentage point–twice what apparently had been anticipated. For the year, that brought the inflation level to 7.5 percent.

We’re not done just yet. Hang in there.

I did mention the increase in medical costs, right? Well, the cost of keeping you and your family healthy is expected to double by 2017 with the federal government expecting that one in every $5 spent by then will be for medical care! Nice if you happen to own a hospital.

Oh, and one more thing. In January, the number of homes that faced foreclosure skyrocketed 57 percent from the previous year. Let’s say that again: 57 percent!

So far, all the talk of helping those who are about to be booted from their homes seems to be just that, talk. What is needed is real action.

Other pressures

Of course, all of this was not caused solely by the subprime mortgage mess . . . China and India are flexing their economic muscles as never before and that is exerting an enormous pull on the world’s economy, changing the landscape even as you read this.

But, make no mistake about it, the subprime crisis is largely responsible. It exposed the greed and, perhaps, criminal actions of banks and other lending institutions throughout the U.S., Asia and Europe.

And now, the piper MUST be paid…with inflated Euros and devalued U.S. dollars no doubt!

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

US Real Estate Crisis Causing Record Economic Distress