Almost a Crisis

by Amy Zidell

5% of loans are said to be junk.
Like many of you, I have been following the financial crisis facing America. I have been thinking about it. I have been talking about it with friends and family. Something doesn't make sense. What we've been hearing is how the rate of foreclosures is going up. Less revealed is that, based on that latest numbers I've heard, 95% of mortgages are current. 95%. That seems like a lot. So, 5% of the loans are considered to be bad. Okay. If you live right next door to a house being foreclosed, it might not be the best thing if you are trying to sell your own house RIGHT NOW. Otherwise, where's the fire?

Why didn't I get an EZ qualifying home loan?
I'm kicking myself that I didn't go out and get myself a zero down, no document, no proof of income loan and buy up some rental homes. Writers and self-employed entrepreneurs don't always have steady pay stubs. You see, it wouldn't even occur to me to do so. Because... it's ridiculous; you can't get something for nothing; and if it's too good to be true, it probably is.

Zero down loans - not a good idea.
I have not been active in real estate for several years. However, I still remember numerous times prospects or clients would ask about a zero down loan. I told them the same thing every time. I advised:
  • A zero down loan is not a good idea. You will have no equity in your home. If the market goes down, you will owe more than your house is worth, and if you need to sell, you will not be in a good position.
I would also advise them to check with their accountant to see how no equity would impact their ability to write their mortgage interest off their taxes.

Borrowers also tend to get better terms when they put a 20% down payment down. Over the course of a thirty (30) year loan, that can add up to a lot of money. A buyer should also evaluate how long they plan to stay in their house.

Insecure secured loans to unqualified borrowers for overvalued homes = bad - duh.
Returning from the real estate symposium...I am not an economist. As I understand it, banks were encouraged, some would say bullied, some forced to make insecure secured loans to unqualified buyers for overvalued homes. These junk mortgages were then sold and, in a process more distasteful than a traditional glue factory, were turned into financial products. These financial products where then sliced and diced into untenable derivatives, which were then sold to markets globally. Good mortgages were blended with bad mortgages with the purpose of spreading the filth across the investment products - i.e. hedging against loss, supposedly.

Many made lots of money selling derived products based on 'duh' loans.
So, 5% of the root mortgages are iffy. 5% mixed up and spread over all these novel innovative financial products that made brokers and brokerage houses lots of money in the course of packaging, marketing, and selling them.

It's an out of proportion response.
Does it make sense that lots of people kicked this can down the road and now value is lost? Funny, isn't it, that the difference between lots and lost is just the order of one letter? That 5% really packs a wallop. That seems out of proportion.

Either something else is going on or this crisis is artificial.
It seems that there must be other economic things going on otherwise the markets wouldn't be so susceptible to foreclosed houses. We've been told there's a tight credit market. There are fears there will be runs on banks. I do recall that the run on and FDIC takeover of IndyMac back was precipitated, some say prompted, by Democrat Senator Charles E. Schumer's letter critical about the bank was circulated. The FDIC steps in stealthily to avoid upset and bank runs. Schumer's letter is counter to this aspect of the FDIC function. What market pushes and pulls are organic and not manufactured?

Aren't too many Americans too far in debt?
Is tighter credit entirely a bad thing? For example, those limited time 0% cards can get you in the hole. You buy things you want, maybe that you need, but that you can't pay for today. You end up paying for it and then some when you factor in the interest that eventually kicks in and you pay that for years. Just look at the number of credit counseling advertisements out there and you know too many American's are carrying too much debt.

Urgent crisis right around quiet time on market.
The timing of the announcements about this crisis comes right around Rosh Hashanah. This is an important and widely observed Jewish holiday and one, which involves no work and time in temple. You check the traffic on Rosh Hashanah, it's very light. Check the volume of the financial markets on Rosh Hashanah and Yom Kippur also light. My experience has been that real crises happen at inconvenient times.

Hey isn't there an election around the corner?
It's not hard and one doesn't have to be partisan to perceive the crisis alarm as being politically motivated. If the polls were more decisive, one way or another, could it be, there wouldn't be a crisis? The difficulty is determining what partisans are to blame. They seem to have been all mixed up together, good and bad, spread everywhere, and are being marketed to the American people.

Don't buy what someone else can't sell.
Make sure to vote this November and don't buy what politicians can't sell. Keep the good ones and send the crooked ones to jail.

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