Jul 31 2008

Mortgages, Subprime Mortgages, Mortgage Bailout

If you are like me, you have read and heard these words so many times recently you could scream!  That being said, there is clearly a good reason for this.  Most of us have a mortgage on the house we live in – unless we rent.  When I was in the process of buying my first house, the financial institution I dealt with required verification on nearly every detail I self-reported to determine if I was a worthwhile credit risk.  I didn’t necessarily appreciate being challenged in this manner at the time but I understood why it was necessary.  This was just the way it was and if it had been my money that I was considering loaning to someone else, I certainly would have done the same or possibly I would have been even tougher.


Between five and ten years ago, a whole bunch of brilliant people (that just happen to occupy positions of great influence) decided that it should be much easier for people with a less-than-satisfactory credit history to qualify for a mortgage.  This was apparently important because home values were shooting towards the stars in many markets and potential buyers needed bigger loans to buy these homes.  Fast forward to present day and guess what we have…you guessed it…all this easy money has resulted in an international mortgage meltdown – and desperate times call for desperate measures!


So President Bush and Congress just signed off on a mortgage bailout at the tax payers’ expense.  According to Congressman John Hall from New York, “The Centerpiece will help many homeowners refinance their mortgages into lower-cost government-insured mortgages that they can afford to repay, preventing the economic pain that further foreclosures would inflict.  The law will also give states and municipalities access to resources they can use to buy and rehabilitate foreclosed properties so they will not depress property values and destabilize neighborhoods.”  This bailout will not undo the hundreds of thousands of foreclosures that have already occurred, nor will it help ease the billions of dollars in losses that many banks are dealing with.


In the United Kingdom, the Treasury is considering giving “a taxpayer guarantee to billions of pounds of bonds known as mortgage-backed securities created by banks out of high quality mortgages, in a radical attempt to revive Britain’s rapidly shrinking mortgage market” according to Robert Preston of BBC News (see Treasury’s mortgage rescue plan).


As individuals, what do we need to know?  Hopefully you are sitting pretty with a nice 30-year (or less) fixed mortgage and you have no trouble making your monthly payment.  If you are struggling to meet your financial commitments, and have some form of exotic adjustable rate mortgage, contact your mortgage company as soon as possible to find out what your options will be once the bailout is implemented.  Until you know the options, you should do everything you can to stay current on your mortgage payments to avoid foreclosure.


If you will soon be applying for your first mortgage, I strongly recommend you consider a fixed-rate mortgage before anything else.  You should compare offers from several lenders, including banks, credit unions, and mortgage companies before selecting one.  Compare and consider the following features: interest rates and points; interest rate lock-ins; required down payments; mortgage insurance requirement; prepayment penalties; and estimated closing costs.  If you do decide to go with an adjustable rate mortgage (ARM), you should know what financial index is used and the lender’s margin (% markup) over the index.  You will also want to know the rate caps and payment caps – and of course any provisions and fees for conversion to a fixed-rate loan.  The good news about the mortgage meltdown (if there is any good news) is that you are less likely to be approved for a mortgage you can’t afford.  These are interesting times…aren’t they?

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Jul 23 2008

What To Consider About Credit

“Credit is a system whereby a person that cannot pay gets another person that cannot pay to guarantee that he can pay.”  – Charles Dickens


Credit…most of us cannot live without it; some of us wish we never knew it existed.  I suspect this sentiment goes back to the beginning of mankind – because with credit comes debt.  When managed carefully, credit is a powerful tool that allows both businesses and individuals to reach for and achieve beyond what could ever be possible if all payments were required up front or upon receipt.  Just stop and think about how your life would be different if you had zero access to credit.  You would need to save every dollar you could for over half of your life just to be able to buy your own home.  You would also have to pay for every purchase immediately or you would need to transfer money in advance of any service you intended to use.  This simply wouldn’t be practical in the world we live in today – you get the point.


As recently as mid-2007, it was so easy to qualify for significant levels of credit – in the form of business loans, lines of credit, mortgages, home equity loans, credit cards, etc. – that many a business or person fell into the “credit trap.”  Now you can’t watch the news without hearing about the soaring level of business and personal bankruptcies and mortgage defaults.  It is simply amazing how quickly the worm can turn.  Tony Pugh of the McCatchy-Tribune News Service reported this month that commercial bankruptcy filings for the first half of 2008 are up 45% from last year.  From April through June, 15,471 U.S. businesses ceased operations.  Today it was reported that quarterly losses for Wachovia were nearly $9 billion due almost exclusively to sub-prime mortgage defaults.  Considering this news, it is no surprise that credit is not quite so easy to come by suddenly.  Regardless of whether it is easy or hard, many of us need to do a better job of making sure we know what we could be getting into before taking the plunge.


As a general rule, it is usually better to avoid using credit if you have a choice – unless of course you are investing in an asset that will likely increase in value over time or the cost of rental exceeds the cost of financing (principal and interest) and you clearly have a long-term need.  If you can deduct the interest on your taxes it makes even more sense to utilize credit and finance…but do not let this be the only reason that you finance an asset.  Easy credit in any form can lead to overspending.  The resulting payments absorb funds that could or should be used for other needs or opportunities (see opportunity cost).


The number one rule of thumb regarding credit is: if you feel like you shouldn’t be purchasing something with credit, you probably shouldn’t.  This applies to personal and business situations.  And finally – never use credit on high-risk investments that would threaten your security if they do not produce the desired results.  I think now we should all go to work getting the economy back on track. 

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Jul 07 2008

The Economy – Blowing Some Steam

“The constant problem of the speculator or analyst is how to disentangle the cold, hard economic facts from the rather warm feelings of the people dealing with these facts.  Few things are more difficult to do.  The main obstacle lies in disentangling ourselves from our own emotions.” – Bernard M. Baruch


Emotions are clearly running high these days; unfortunately not in the warm and fuzzy sense.  Most of us that are tuned into the economy and the markets are sitting on pins and needles hoping to recognize a positive sign – just one.  I for one am confident it will get better – it always does.  When and for how long is yet to be determined.

From what I have been able to determine, there are three very serious underlying causes for the current economic storm.  Two are closely related and should ease up over the next two to five years.  The third is really tough.  All are either caused or magnified by ignorance, short-sightedness or extreme greed.  The sub-prime mortgage debacle and the speculative real estate bubble are clearly related and they will eventually be nothing more than an unpleasant memory.  The toughest of the three is none other than the increasing demand for black gold – and unless someone perfects a salt water-powered engine soon, the pain will only increase in years to come.

All of us are being hurt by the sub-prime mortgage mess and to be honest, it infuriates me to think about how many highly-paid financial professionals, entrusted with other peoples’ money, could believe that lenders with a history of not paying their bills would suddenly become responsible when approved for a loan worth several hundred thousand dollars.  At the height of the fury it is possible that my twelve-year-old daughter qualified for her own mortgage without credit or a job.  Utter foolishness that everyone around the globe is paying for right now!

Less than two years ago, the trick was to pay a deposit for a condo or home being constructed and then flip it for a nice profit before you had to start making monthly payments.  Well – those days are gone and now all of a sudden we have a glut of available properties with no buyers.  Worst of all, every day thousands of property owners are defaulting on their mortgages.  It seems that someone should actually buy a condo or house to live in once in a while – and have enough “real” income to pay for what they buy.

As I suggested above, the mortgage mess and the real estate bubble are likely to be short-term problems that will eventually get better.  I am truly concerned about oil over the long-term, however.  Prices will stabilize and possibly even decline in the short-term, but unless we dramatically curb global demand growth somehow, we are heading for completely uncharted economic territory.  I know most of you realize that petroleum derivatives make up or are used in just about everything that we all depend upon every day!  To support what I am saying here, the May 2008 issue of National Geographic contains a terrifying graphic that shows China’s oil imports in 1996 were 166 million barrels/year.  Ten years later in 2006, they were 1.065 BILLION barrels/year!  Considering only the automotive markets, in 2006 there were still only 30 million cars and light trucks on the road in China and the population was estimated to be 1.3 billion.  In the U.S. there were 240 million cars and light trucks on the road and the population was about 285 million.  I am no automotive market expert, but I would tend to believe that someone plans to sell more cars in China.  I don’t even want you to think about all the other potential markets in China – not to mention all the other developing countries throughout the world!

So what should WE do?  Some of us obviously have more influence than others, but for the most part we are all just along for the ride.  It is important to stay abreast of what is going on in order to make the best decisions – but I suggest (and I will do my best to take my own advice) that you avoid letting all this unsettling news eat at you.  Focus on the things in your life that you have control over and do your best to let go of what you cannot control.  You will likely live much longer and be happier – not to mention you will accomplish a great deal more in the process!

Boy do I feel better now…hope you can say the same.

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