The Mortgage Guy Blog

When the going gets tough, to hell with integrity, change the rules. We can file this under “the government in it’s attempt to fix a problem only perpetuates it”. Apparently the government and lenders are working out a plan to freeze mortgage payment resets. Here are some details on the mortgage payment freeze plan from Marketwatch.

The report said the gist of the plan was to extend the low introductory rates on home loans made to borrowers who will have trouble meeting higher reset rates. Under one scenario, the extension of lower rates could run as long as seven years, the report said.

This a marvelous way to fix the real mortgage meltdown issue, which is securitization. /sarcasm The government will restore efficiency and integrity to the mortgage securities market by telling current investors we are changing the rules on the investments they bought. We are changing them in a manner that will negatively impact their holdings. By the way, do you want to buy some more mortgage securities?

The second issue I have with this initiative is that the government shouldn’t be bailing out people who have very little invested in their homes. I’ve stated it before, there is a class of homeowner out there that is nothing more than a glorified renter.

If it turns out resources for this plan are finite and only some homeowners can get the prescribed payment relief, homeowners who put money into their purchase or have the most equity, should be first in line. Financial prudence should be rewarded over financial irresponsibility.

Graph courtesy of Credit Suisse
Furthermore, studies have shown that the mortgage payment reset phenomenon as it stands now, will last for the rest of this decade. By extending these resets for another four to seven years, without addressing the real issue of securitization, will only delay the inevitable and at a greater expense than currently faced with.

Without securitization, there is no mortgage industry. This bailout is contrary to saving the mortgage securitizaton process.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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We’ve been screaming at the top of our lungs that the mortgage and real estate meltdown could lead to the worst economic conditions since the Great Depression. With every passing day, the evidence mounts that this is happening.

Here are a couple of snippets from a post over at Minyanville. The emphasis is mine.

Capital impairment is everywhere and capital impairment is going to restrict the ability of banks to lend.

Bernanke and everyone else who are focused on capacity utilization, oil prices, the U.S. dollar, wheat or food at the local grocery store are simply focused on the wrong things.

The correct focus is on the ability and willingness of banks to lend, and the ability and willingness of consumers and businesses to borrow. Everything else is a sideshow.

The lack of ability to lend and the lack of the willingness of banks to lend led us into the Great Depression of the 1930’s.

In the 1920s, in the U.S. the widespread use of purchases of businesses and factories on credit and the use of home mortgages and credit purchases of automobiles, furniture and even some stocks boosted spending but created consumer and commercial debt. People and businesses who were deeply in debt when a price deflation occurred or demand for their product decreased were often in serious trouble—even if they kept their jobs, they risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.

Massive layoffs occurred, resulting in unemployment rates of over 25%. Banks which had financed a lot of this debt began to fail as debtors defaulted on debt and bank depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used. Bank failures led to the evaporation of billions of dollars in assets. Up to 40% of the available money supply normally used for purchases and bank payments was destroyed by all these bank failures.

Sound familiar? Do you see a very dangerous parallel with the past and the present? Need more proof a similar scenario is unfolding before our eyes? Consider this Rueters article “Housing slump ups chance of recession: Goldman Sachs“. Again, the emphasis is mine.

Weakness in construction and consumption will likely shave 2 percentage points from real U.S. economic growth in 2008, and will likely increase the unemployment rate to 5.5 percent from the current 4.7 percent, the U.S. investment bank said.

The effect of a U.S. housing market that is “mired in a full-blown vicious cycle” suggests the risk of recession has risen to a range of 40 percent to 45 percent, Goldman said.

Home prices will likely decline by 15 percent from their peak. But if the United States enters a recession — which Goldman expects the economy to narrowly escape — home prices could fall as much as 30 percent nationwide, it said.

Citing economic weakness, Goldman analysts cut their rating on industries involved in a wide swath of the U.S. economy, including automobiles, airlines, hotels, truckers, human resources and staffing providers.

Although the Fed isn’t taking appropriate actions to avoid a full blown depression, they do see the writing on the wall. Federal Reserve Vice Chairman Donald Kohn made these statements in a Bloomberg article today.

“turbulence” may reduce credit to businesses and consumers, suggesting he sees higher risks to economic growth than a month ago”.

“Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses,”

There is a bad moon arising and no one is doing anything about it. All of the talk to fix our problems are so far off the mark that disaster is all but inevitable. Meanwhile, the mainstream media and our politicians keep the general public ignorant to the impending disaster.

Buckle up, there is a very rough ride ahead. I do see a bad moon arising.

Bad Moon Arising

http://www.youtube.com/watch?v=CODGWypHpW4

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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Below are selected news headlines that will bring you up to speed on the mortgage industry and the effects it is having on the overall economy. Basically the mortgage industry is broken. Wall Street will not buy mortgage securities so lenders aren’t meeting the demand for loans. Only the most credit worthy are able to borrow on favorable terms.

This is causing three major problems. One is nationwide real estate values are plummeting at a historical rate. The second problem is that homeowner’s ability to borrow has been greatly diminished and could disappear all together. The third problem is that lenders are not able to securitize their mortgages.

If they can’t securitize they won’t lend. Also due to the massive depreciation in the values of their mortgage security holdings, the lenders themselves are in jeopardy of going out of business.

If the consumer cannot borrow, the consumer will not spend money to keep the economy growing. Consequently, there are more and more predictions for a recession in 2008. The effects of the mortgage and real estate crisis on the economy are just beginning to be felt. In fact we’re in the very early stages of this economic meltdown.

In any event, here are some articles to support these views.

Articles pertaining to the subprime situation

• Subprime Crisis Not Over, More Writeoffs to Come
• Freddie Mac’s subprime losses may hit $5 billion: CS

Effects On The Economy

• Mortgage crisis a drag on Atlanta economy
• Report: Sharpest drop in housing prices in index’s history
• Consumer confidence lowest in two years

The Big “A” Paper Lenders Take Big Hits, It’s Spreading…

• Countrywide: No blow from Freddie loss
• Citigroup gets $7.5 billion infusion from Abu Dhabi
• UPDATE 1-Wells Fargo to take $1.4 bln charge for bad loans
• Freddie Mac hit by huge loss, says needs capital
• Fannie Mae shares hit decade low on loss concerns

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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In the course of a year, the mortgage industry has dramatically changed for the worst. Because Wall Street can no longer securitize mortgages efficiently, we have seen over 180 lenders go out of business and over 100,000 layoffs in the industry. It’s so bad, that even the strongest lenders are at the brink of failure.

Needless to say, this has negatively impacted the mortgage choices once available to home owners. Home owners looking to refinance now will find only a fraction of the programs that were once available to them. Many will not be able to refinance at all.

Now is not the time for procrastination. If you have decided to refinance, you are probably better off doing it right now. If you wait, only more lenders will go out of business and more mortgage programs taken off the shelf. It will be more difficult to qualify for any mortgage programs that are left.

Additionally, home values are falling daily. By waiting, the collateral used for the refinance will be worth less than today. This will affect the over all terms a borrower can get on the refinanced mortgage. Generally speaking, the higher the loan to value, the worse the terms. Value drops can be to the extent that PMI, or private mortgage insurance, could be necessary. Or worse, they can drop to the point where a refinance is no longer possible under any circumstances.

Even though the current interest rate environment might coerce home owners to wait for the coming lower rates, the value being lost in their homes can offset any benefit lower rates offer. If you get a rate that is a percentage point lower than today’s rate, but you have to take out PMI because your value dropped, what good is that? The cost for the PMI can more than offset the lower interest rate.

Besides, conventional rates are very attractive right now. It’s possible to get a sub 6% thirty year fixed rate mortgage as I write this. Fifteen year fixed rates are even lower. These are attractive rates by any standard.

The risk of not having viable refinancing options is too great. If you have a sensible loan scenario awaiting your approval, take advantage of it right now, while you still have equity and the mortgage programs still exist. If you are even thinking about doing anything with your mortgage in the next year or so, I encourage you to look at your options right now as you may not have them later.

Tags: Finance & Economy, Mortgages, Real Estate, Tips & Tricks by The Mortgage Guy
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One can hear the cries loud and clear. Homeowners looking for relief from upwardly adjusting mortgages and the politician’s cries that they must be helped. While I agree the home owners should be helped, I do so for different reasons. My main reason is to save the mortgage and real estate industries and probably the American economy as well.

Even if there were the political and financial will to assist these home owners by freezing or lowering their payments, chances are it cannot be done. Imposing a modification of debt notes on note holders, in such a way that it depreciates their value, is a dangerous endeavor. Such an initiative can destroy our debt markets and perhaps the securities market in general.

If payment freezes or reductions were imposed, the value of the mortgage security would be negatively impacted. As it stands now, a dollar of an adjustable rate mortgage security yields “x” in interest. Furthermore, the adjustable feature is a hedge against interest rate movements, the yield is determined by the spread, which remains constant.

Lowering the payment lowers the yield thus lowering the value of the mortgage security. Freezing the payment removes the hedge aspect of the mortgage security and that too can depreciate the value of the mortgage note.

Forcing note holders into either or both of these scenarios is unfair and destroys the integrity of the mortgage security. In my opinion, the only way to accomplish either freezing or lowering payments is to do so in such a way whereby the mortgage security/note maintains it current and future values. That is to say in exchange for freezing or lowering the payment schedule, the note holder must receive something of parity.

Equity Sharing

That something of parity can be sharing in future appreciation of the borrower’s home. The potential for a return on capital in the form of sharing home appreciation could offset the affects of lowering or freezing payments.

It could work something like this. At the time the mortgage note modifications are agreed upon, the property is appraised to establish a base line value. At some point in the future, either when the loan is refinanced or the property is sold, the note holder would receive a portion of the home’s appreciation.

As long as the home doesn’t appreciate in value, it cannot be refinanced. It can only be sold either at a loss or break even. In this case, the note holder wouldn’t receive any compensation for modifying the note. Except the benefit of keeping the note current and the receipt of current yield. Additionally, the expenses of foreclosure and a short sale are also avoided.

Because there is little on the table for the note holder if the property doesn’t appreciate, some incentive needs to be added here. That something can be some type of agreement on the borrowers part to agree to a streamlined and discounted foreclosure process should a worse case scenario evolve.

Thousands of dollars in expenses are incurred during the foreclosure process. This diminishes the net benefit to the note holder. By agreeing to a streamlined process, thousands in fees and expenses can be avoided.

Problem Solved

The home owner wins because they get to continue to afford to stay in their home. The note holder gets something of parity for modifying the note. The debt securities market maintains it’s integrity because the note holders aren’t left holding the bag. Confidence returns to the mortgage securitization process and the industry is saved thereby saving the real estate industry and the American economy.

Politicians get to make themselves look good, oop I mean help, by making the proper legislative adjustments to facilitate the modifications. They can even throw a finite and defensible amount of money at the problem if needed.

I’m not a securities analyst. I cannot provide the details of what would be necessary to satisfy the parity needs of the note holder. None the less, this is a scenario that has the potential of working. It’s far better than any plan that I have heard floated so far. That’s because to date, there are no plans to fix our very broken system.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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A November 11 through 14 Gallup poll further reveals that only 20% of Americans are satisfied with the direction of the country. This is the worst poll reading of this kind since they started tracking this sentiment.

An extraordinary 78% of Americans now say the economy is getting worse, while a scant 13% say it is getting better. Gallup has been asking this question since 1991, and these are the most negative responses Gallup has ever recorded.

The American people realize there is little to be positive about. Trillions of dollars in wealth is evaporating before their eyes as their real estate values plummet. Even if they still have equity, lenders have tightened up guidelines to the extent that those who need help the most cannot get it.

The home equity ATM is closed. This is very bad news for the economy as home equity provided the cash for consumers to keep shopping. Now there is no longer a safety release valve for burgeoning credit card balances. This is pointed out in Newsweek’s Consumer Crunch article.

The main fuel for the spending was easy access to credit. Banks and other financial institutions were willing to lend households ever increasing amounts of money. Any particular individual might default, but in the aggregate, loans to consumers were viewed as low-risk and profitable.

The subprime crisis, however, marks the beginning of the end for the long consumer borrow-and-buy boom.

With the pressures of plummeting real estate values, a lack of liquidity due to the debt markets being in a shambles, a weak dollar and a consumer who is all but tapped out, is there any reason to believe economic recovery is anywhere in sight?

I didn’t even mention the ever escalating oil prices. The price of oil and gas has a similar affect on the economy as does a tightening in interest rates. So any relief the Fed gives us is being offset by higher oil prices. Yet the Fed believes their rate cuts are sufficient.

Until mortgage securitization becomes close to normal again, real estate prices will continue to fall and the liquidity crises will deepen. The mortgage and real estate crises will continue to grow as will it’s negative affects on the economy.

Now the over-worked consumer doesn’t have the resources to keep buying. Even if they had the resources, why would they want to with impending doom on the horizon. Consumer sentiment is souring by the minute.

It’s only a matter of time before this new development causes more negative ripples in the economy. It’s not unreasonable to expect cut backs from manufacturers and service industries. The disease of economic woe continues to spread.

We are on a very slippery slope with no brakes to slow down the fall, let alone stop it. Meanwhile, the band plays on and on.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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There is a grand standing rush for our political leaders to act like they are doing something about the mortgage crisis. Much of what I have seen in the way of proposed legislation and initiatives fall far short in solving the problems. In fact, I see them causing more harm than good.

Our media and politicians are crying out for some type of home owner bailout. In fact, there are initiatives already under way. Massive amounts of taxpayer money are being earmarked for bailout funds and education/counseling.

This brings me to my question. Would the government do the same if these home owners were renters? Would they setup rent assistance funds and allot taxpayer money for the purpose of educating and counseling people who rent their dwellings?

A recent Market Watch article provided this characteristic of first time buyers…

But consider this: 45% of first-time buyers bought with no money down, and the median down payment of a first-time buyer was 2%.

Is there a difference between a home owner who has zero equity and never put any equity into a house and a renter who also has zero equity in their dwelling? From a personal balance sheet perspective, there isn’t. At least not to the net worth bottom line.

I don’t think there is a difference and that is why I question initiatives to assist this particular group of home owners in trouble. Lacking any differences, why do these people get special treatment over renters?

The government and media need to realize that not only is it impossible, but it is a waste of time and money to try to legislate…

• A minimal amount of financial sophistication
• Credit worthiness
• Personal responsibility
• A capability to meet credit obligations

While the focus of the media and politicians is on doing the impossible, the real problem goes unsolved thereby becoming more ominous with each passing day.

The mortgage and real estate industry cannot exist without a fine tuned and efficiently running mortgage securitization machine. The machine is broken and no one is doing anything about it. They aren’t even talking about it.

Until integrity, confidence and efficiency is restored to the mortgage securitization process, the crisis will continue grow. There no way the industry can survive without it and every effort must be made in order to save it. Every American’s economic well being depends on it.

Tags: Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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The mortgage and real estate meltdown is becoming apocalyptic in size and influence. An annihilation of the U.S. economy is a very real possibility. The pain is spreading globally as well. As bad as it is and it is very bad, the worst is yet to come. If you doubt me, just think about this. Congress has mobilized to “fix” the problem.

When faced with a dilemma as foreboding as this one, placing blame is a must. Even if you blame the wrong guy, that’s okay as you must blame someone; anyone. Of course this task accomplishes nothing and wastes valuable time and resources. None the less, it feels good and gives the appearance the problem is being dealt with.

True to form, our political leaders and the media have taken up the blame task. Congress and the media are well on their way to effectively dealing with the problem as they have designated their “bad guy”. It’s the mortgage broker.

Warning: There is very offensive language in the clip.
Say Goodnight to the Bad Guy

http://www.youtube.com/watch?v=4pW2ZOBi01U

In an industry cast with many players, from the borrower to the investors buying mortgage paper, the political and media elite would have you believe the bad guy is one of the middle men in the industry. A middle man who is responsible for roughly half of all mortgage originations.

It matters not that this middle man has nothing to do with the flawed design of the products or their final disposition in some investment fund. The mortgage broker is the culprit. After all the media says so and Congress has them in their cross-hairs.

What is obvious to me is that Congress and the media is wrong, dead wrong. Sure brokers share some responsibility for the current economic dilemma. However it’s not to the extent the political and media elite would like you to believe. So let’s take a look at all of the players and try to determine who bears the most blame.

Here is the cast of players in the mortgage industry…

• The Borrowers
• The Originators (both brokers and lenders)
• The Lenders (in the roll of underwriting and pooling mortgages)
• The Investment Firms (responsible for converting mortgages into investment securities)
• The Investors
• The Ratings Agencies (responsible for rating the risk of securities)

How it all works…

Here is how the industry operates in a nutshell. Borrowers seek to borrow money, they contact an originator which can be a broker or lender. The originator will make a loan offering based upon the borrowers characteristics and the lenders guidelines or rules. The lender ultimately decides if the borrower gets the loan. The lender makes the rules that borrowers and originators must follow.

The lender’s rules or guidelines are based upon the requirements set forth by the investment firms. In order for lenders to operate efficiently, they must be able to sell their loans to investment firms to free up money to lend yet again.

Lenders do not lend if the investment firms aren’t buying the mortgage paper. In essence, final loan decisions by the lender are based upon the investment firm’s rules and guidelines. Yes lenders have a higher source to answer to.

The investment firms set their rules for buying the mortgage paper. They must assess the risk characteristics of the loans involved. They categorize and pool up the mortgages based upon the risk factors of the loans. After assessing and bundling up the mortgages, they sell the final investment vehicle to investors usually consisting of large institutions.

Investors rely on the ratings agencies to properly assess the risk elements of these mortgage securities. Additionally, both the institutional investors and selling investment firms alike, have risk management departments whose job it is to determine the risk aspects and suitability of the mortgage investments.

They are the watch dogs. Their job is too make sure the investments in question do not have excessive risk characteristics.

Fast forward to the mortgage meltdown of 2007

Due to an unprecedented number of loan defaults, investment firms are no longer buying any mortgages except those of the highest credit quality. The defaults are due to borrowers agreeing to mortgages with escalating payments they can no longer meet.

Lenders gave these loans to borrowers without the borrower having strong credit histories and in many cases, the proof of the capacity to repay the loan. The lenders also didn’t require that the borrower have capital at stake in these transactions. The lenders financed 100% of the purchases. All the while, the investment firms and ratings agencies were giving the lenders their blessings.

The end result of the loan defaults is a historic number of foreclosures pushing down the price of real estate to dangerous levels. Furthermore, now that investment firms aren’t buying but the best of paper, the lenders have drastically scaled back their loan offerings.

Borrowers needing to refinance out of mortgages they no longer can afford cannot do so because their home values are less than their loan balances and lenders are not offering the necessary products. This just causes the meltdown to get worse, in essence feeding upon itself.

Adding to the downward spiral is the fact many of these troublesome mortgages are yet to upwardly adjust their payments. Meaning there will be even more borrowers faced with not be able to afford their payments and ultimately defaulting. Of course these future defaults will lead to more decreases in the value of real estate and the personal wealth of millions of Americans.

With all of this unfolding, it is plain to see that without investment firms buying and trusting the integrity of mortgage securities, the mortgage industry doesn’t exist.

Unless the system of turning mortgages into investment securities is fixed, we are looking at years of financial and economic pain. Perhaps the total destruction of the American economy.

All right already, who is to blame?

The problem is that borrowers were given improper loans for their circumstances and are unable to repay these loans. Originators could not offer these loans unless lenders were willing to make them. Lenders would not make these loans unless investment firms were willing to buy them. The investment firms and their clients, the buyers of the investments, would not be involved with the mortgage investments unless the rating agencies and risk departments gave these mortgages their stamp of approval.

It’s rather plain to see who is not to take the most blame. That being the borrower, the broker and the lender. They are merely middle men operating according to rules that are ultimately set by the investment firms. The investment firms ultimately make decisions based upon the rating agencies and risk management departments.

That being so, the sleeping sentinels turn out to be the rating agencies and risk departments. Based on their erroneous stamp of approval, investment firms made seriously deficient decisions that effected every player in the industry including the consumer.

The mortgage securities causing all of the woes of today are exactly the same as they were two, three and four years ago. Now it’s come to light just how wrong these self policing entities were and we are just beginning to pay the price for their mistakes.

The bad guys are the rating agencies and the risk management departments.

Having a basic knowledge of the workings of the mortgage industry, it’s plain to see that the political and media elite are wrong in blaming the mortgage brokerage community for the current economic crisis.

Instead of directly addressing the most important and primary problem, which is mortgage securitization, Congress is focusing on the middleman, the broker. They stand ready to legislate more laws and regulations on an already overly regulated industry. The end result will be mortgage brokers going out of business leaving consumers with less choices and more expensive ones at that.

Meanwhile the mortgage securitization machine is broken and no one is paying attention. As long as the machine is broken, the mortgage and real estate industries cannot be repaired. The pain and the crisis will continue while our political, media and business elite are focused on minutia.

So say goodnight to this bad guy. There’s a bad guy coming through, you better get outta the way…

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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It should come as no surprise that when the mortgage industry began it’s meltdown, first time buyers would suffer. As the industry imploded, 100% purchase mortgages became harder and harder to find.

Market Watch reports today that 45% of first time buyers financed 100% of their home purchases. It goes on to say that the median down payment for first time buyers is a mere 2% of the purchase price.

So without liberal 100% purchase financing readily available, there are no first time buyers to drive the real estate market. This will undoubtedly have an affect on the over all real estate market, not just the entry level market.

Fewer first-time buyers can have an effect on an entire housing market, when homeowners looking to trade up to a more expensive home have a harder time finding buyers for their starter homes.

Yes there is still 100% financing available for purchases. However, it is only being extended to the strongest of borrowers. People who can prove their income, have a strong credit score and are actually able to save a few bucks.

Contrast this to the 100% financing of yesteryear, which only required a 580 (”B-” credit) credit score, no proof of income or the ability to save money. Based on the article’s statistics, there is no longer a first time buyer market.

“First-time home buyers will be much lower for next year’s survey, given the credit crunch,” said Lawrence Yun

Arguably, people who cannot balance a checkbook (many in this market don’t even have one), cannot save a month or two’s income and don’t have a history of paying bills on time should not be home owners. Borrowers that are this weak will undoubtedly have a difficult time maintaining their obligations. This is what we are seeing today and this is a contributing factor to the mortgage meltdown.

So even though our government, in it’s infinite wisdom, seeks home ownership for everyone, the natural forces of economics and finance dictate otherwise. Now that the chickens are coming home to roost in the mortgage industry, the hypocrites in government are targeting the industry for delivering exactly what it sought.

To make matters worse, government actions to deal with the mortgage meltdown, will only make products that foster a strong entry level market even more scarce and expensive. In fact, their actions will kill and shrink the mortgage industry, making consumer choices scarce and more expensive.

Government initiatives of this sort have the potential of leading this country, it’s economy and it’s people into a 1930’s style depression.

Tags: Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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While I don’t expect the general public to fully understand the size and scope of the current mortgage and real estate meltdown, I was hoping that at least the professionals from these industries would. My hopes are unanswered as evidenced by this letter to the editor of my local newspaper. The letter was submitted by a realtor. The emphasis is mine.

Why gloom and doom on housing market?
News-Times Staff
Article Last Updated: 11/12/2007 05:07:16 AM EST

After remaining silent over the daily bad news about the housing slump, the front page article, which once again shouted the sky is falling, finally got to me. The statistics were inaccurate. Using the MLS, there were 132 closings in the greater Danbury area in October of this year, not 88.

The current market is down, no argument. We have become accustomed for about 10 years to a seller’s market and coming down to earth is hard.

I became a Realtor in 1988 when the inventory was high, buyers were scarce, and interest rates were in double digits. Real estate is cyclical, and the most recent cycle outlasted all expectations.

The problem we are facing now is that the driving force in the market, moving up, is no longer in play. The 100 percent mortgage financing that was so plentiful has virtually disappeared, and the requirements for qualification are changing daily.

On the bright side, there are buyers, rates are low, and the inventory is pretty good. The smart people are figuring this out, but it would be so helpful if the media would look at all sides for a change.

If you keep on forecasting gloom and doom, that’s what you will get. The truth of the matter is, if you buy a home today, you are well positioned for the next surge in pricing.

How about some positive news about home ownership?

Pat Linnell

WOODBURY

The problem we are facing now is that the move up market is no longer in play? Give me a break or pass the Kool Aid.

The truth of the matter is if you buy a home today, you are well positioned for the next surge in pricing? Sure and if you keep saying tomorrow is Christmas, eventually you will be right.

I suppose, according to Realtor Linnell, we are supposed to ignore facts presented by the likes of Hartford Business dot com.

Reports published last week by Boston-based Warren Group reveal that the tide is turning in the Nutmeg State. A double-digit decrease in home sales along with an alarming number of foreclosures — at 2,948 — in Hartford County alone, reflect the state’s fractured housing market.

Statewide, there have been 12,575 foreclosures, with New Haven County hardest hit with 3,914 foreclosures.

While home sales have plummeted in the past, state officials do not recall when the number of foreclosures has been so great.

“We’re concerned because this is not a typical situation,” said Howard Pitkin, commissioner of the state’s Department of Banking. “This is not something that has happened frequently in the state, and we need to address it.”

The foreclosure process is lengthy one. There is a great deal of time between the initial filing and the actual sale of the property being foreclosed upon. It is when these properties sell, at steep discounts to market, that they will begin to affect the prices of homes not in foreclosure.

In this context, the worst is yet to come from a home value perspective and anyone buying a home now will only see their value decline as these thousands of foreclosed properties hit the market and sell.

Not only does this add to the glut of inventory, it adds thousands of properties that will sell at depressed values. This is only half of the equation, the supply half. On the demand side of the equation, it gets no better.

As the real estate “professional” states, subprime mortgages and 100% mortgage loans are gone. Common sense tells you if the programs are gone so are the buyers that needed them to qualify for home financing. Add to this the prime and alt “A” mortgage market feeling the subprime pain and you now have “A” paper borrower’s having their ability to borrow and buy severely impacted.

This means that there is less demand for the properties on the market, foreclosed or other wise. Obviously, the supply/demand equation on Connecticut Real Estate does not bode well for Connecticut property values. As such, why would anyone be buying now who didn’t have to?

Here is another snippet from the article.

There are an estimated 71,000 subprime mortgages in Connecticut worth approximately $15 billion, and it is possible that up to 8 percent of those loans are delinquent, he said.

Lets do some math. Eight percent of 71,000 subprime mortgages is 5,680. Eight percent of $15 billion is $1.2 billion. So we are to believe that 5,680 potential foreclosures with a market value in excess of $1.2 billion is only a blip on the real estate value radar? The realtor’s letter would have you believe that this is business as usual.

Linnell draws a parallel among the late eighties market and the market of today. However, in the late eighties, there was no political witch hunt affecting the mortgage industry. In the 80’s, 182 lenders, prime and subprime, hadn’t disappeared from the face of the earth. In the eighties, foreclosures were not running at a pace to anything similar today. In the eighties, mortgage programs were beginning to proliferate not shrink by almost half. It’s plain to see that the comparison of the two markets is ill conceived.

Now here is what I believe is a more appropriate perspective of our economy and the real estate market.

In the 1920s, widespread use of the home mortgage and credit purchases of automobiles and furniture in the U.S. boosted spending, but created consumer debt. People who were deeply in debt when a price deflation occurred were in serious trouble — even if they kept their jobs — and risked default. They drastically cut current spending to keep payments on time, thus lowering demand for new products. Furthermore, the debts grew when prices and incomes fell 20-50%, but the debts remained at the same dollar amount. With future profits looking poor, capital investment slowed drastically. In the face of bad loans and worsening future prospects, banks became more conservative in lending money. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed, and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.

You will find this excerpt in Wikipedia’s search result for “Great Depression”. Which scenario do you see most similar to today’s circumstances? Ah but not to worry, because as the realtor states, tomorrow is Christmas. /sarcasm.

Tags: Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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