"Refinanced Loan Modifications", "No Doc", "Low Doc" Loans
was put into some perspective today....If you get a chance
to watch C-Span...today may be a great day to do so.
Treasury Secretary Henry Paulson, Housing and Urban
Development - Director Alphonso Jackson and Fanny Mae - CEO
Daniel Mudd....among others discussed Mortgage Markets and
"how bad can it be?" scenarios. What was most revealing was
their concept that this is in fact - A Global Liquidity
Crisis...not just a localized problem here in the good old
USA. Japan, China and Europe are in this mix. Why, you
might ask? So, in order to grasp a tiny straw of temporal
understanding on this issue - all of us will need to pay
close attention.
We like to keep things simple....so let's start off with
this basic concept: "Do you know who holds the loan or
loans on your property or home?" What happens to begin
with...is the re-sale of loans, the re-sale of the re-sale
of loans......many times without full disclosure. It is
quite akin to those Financial Institutions that buy old
Credit Card Debt. They buy those accounts for pennies on
the dollar and then attempt to get full restitution of the
original debt. The example might be that say Countrywide
Financial was the original originator of your loan....they
sell your loan to a Secondary Lender...it doesn't affect
you initially because it is just a paper name change. Your
rates won't change...nothing changes....but Countrywide is
"out of the loop". You now have ABC Financial....and they
may in fact sell your loan as part of a package to some
other discount loan brokerage. Every time they sell your
loan....a name change and some Broker has made anywhere
from 1% to 20% on the exchange. Eventually, you will be
paying that freight....but in the meantime, if you got a
Sub-Prime Loan to begin with.....when the time for a "Re-Set
Interest Rate" comes...you may not notice the tiny changes
...that may be awful. That original loan to Countrywide...
may have been straight forward....now may become a little
muddled. Buyer beware and keep alert on this nonsense. You
could have had your load sold to a predatory lender......and
in most cases....there is nothing you can do.
OK, now let's get back to how all this happened. Somewhere
around 2001 Loans that required Asset Based Equity...changed
to Income Based Equity. What does that mean? It means that
instead of Companies basing their loans on actual other Real
Estate, Hard Currency or Commodities...where able to borrow
on things like Stocks with high returns, Derivatives, Hedge
Funds or anything that could show an annualized return on
Investment. Say, Vito Corleone has a nice Hedge Fund in
Turks and Caicos that returns 35% a year. Your loan might
be based on the this return to the Lender. Or maybe Manuel
Norriega had a nice Derivative Fund from the Bahamas...that
returns 50% per year. Sure, this they could use they to assure
that your Lender would get his money if you failed to make
your payments. It goes on like this....just get the feel for
now. These are called "Non-Conforming Assets"!
So, what happened? Well, it started like this...a rising
Real Estate market that wouldn't stop...remember that a year
or two ago? It supported this speculation and encouraged
people to buy houses, trade houses, invest in housing. It
propped up developers and new housing manufacturer. It took
people and said: "State whatever income you want and borrow
whatever you want." They started with borrow 80 percent and
then borrow the other 20 percent to borrowing 90 percent and
then borrowing the other 10 percent to finally just borrowing
100%...because Real Estate values were accelerating at light
speed. Every lender knew...that in a rising housing market
appreciating at 10 percent a month......that if you defaulted
and went into foreclosure.....they would love to take the
property back and sell it for another 40 to 50 percent later.
The bubble popped. The "Re-set Interest Rates" kicked in and
now the monthly payments due went up by 30 percent with maybe
bigger kicks due later. NO new Cash flow..and payments that
were only possible for the chosen few. People started walking
away from their homes - whole communities have walked away..
including Stockton, California and lots out in Riverside and
San Bernardino...and it became Deja Vu all over again Re: the
S & L Crisis of the 80's. Property values have fallen 15% to
25% based on wherever you are. The real value which eventually
will fall 50%....or more and scare most people, have markets
shaky and uncertain.
Why? We have a Capital Liquidity and Security Market crisis
because these markets are all tied together in our Global (sic)
community! The sad story is that only 20% of all these loans
were for Single Home Owners. The rest were investors, speculators
and institutions! The other telling number is that 50% of all
Home Sales were based on Sub-Prime Loans and lending. Last year
their were 5 million homes sales. This year may be less than
1 million. The Federal Institutions of Fanny Mae, Freddie Mac,
FHA and VA....are being asked to bail out home owners and those
investors. This requires that the Feds print money like crazy
and that the Fed assume the Sub-Prime loan re-finance. Right
now they are only prepared to support about 20% of those loans.
That leaves 80% to drag down the rest of the market. We need
to stop all new housing construction immediately. We need to
mark down most old houses 50% and new houses by 30% if we can
expect to get out of this mess.
Moody's and S & P are rating agencies that support this "Income
Based Equity Market Loan System". The rumour is that they are
quickly returning to "Asset Based Equity Market Loans". Hoping
that lenders that you may not even know making those "Loan
Modifications" that will freeze the original Sub-Prime interest
rates is optimism without reason. Federal Regulations will be
required for the Rating Agencies, for Institutional Lenders and
for all Secondary Market Lenders. Secure reserves, licensing
and full disclosure are just a few of the things required. There
is currently 2.5% of all US housing that is empty...that figure
is estimated to grow exponentially in the months to come.
The days of "teaser rates", "rising Real Estate values", "betting
on Equity futures" and "free money" are temporarily over for the
next 18 to 24 months. Hopefully, we can all just hunker down and
pray that the rest of the wheels don't come off soon. Real Estate
Value Free Falls, Market Corrections, Foreclosures, Bankruptcy
and Recession....are all issues we need to deal with...right now!
Since Al Gore has a solution for Global Warming....maybe he has
one for the Real Estate meltdown too! Freezing current interest
rates is no solution....for the day of reckoning will come and
when it does......we will all need to be prepared. The time has
come to call your Assessor's office....and pay taxes on the true
value of your home....not what you bought it at.
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