| The sweeping failures of "sub-prime" mortgages | | | | While this is a simple explanation, it drives home the |
| (which is a fancy way of basically saying every home | | | | point, which is this: Your home loan probably serves |
| owner with a adjustable rate mortgage) and higher | | | | as collateral for mortgage backed securities someone |
| interest fixed rate loans, could have an economic | | | | else owns. Why does this matter? For a number of |
| impact on you greater than what you are hearing in | | | | reason: |
| the news. | | | | |
| As I mentioned in my December 2006 Ezine article | | | | 1. As borrowers default on home loans, lenders have |
| "Everything A Real Estate Agent Doesn't Want You | | | | to repossess those properties. |
| To Know, A Year In Review 2006" the real estate | | | | 2. As properties are repossessed, they go on the |
| market was at the end of the bubble and the boom | | | | market and increase the supply of housing, which |
| was going to go bust... and it has only just begun. | | | | lowers selling prices. |
| There are multi-dimensional repercussions to the | | | | 3. Rates are a function of risk, and, as investors who |
| mortgage failures being touted on the news today. | | | | buy mortgage backed securities get nervous, they |
| Let's consider a few things: | | | | will have to be paid a higher interest rate to entice |
| | | | them to invest (or stay invested) in mortgage |
| 1. The mortgages were made to home buyers by | | | | backed securities. |
| greedy lenders, catering to the real estate industry, | | | | 4. This creates a ripple "down effect" most probably |
| at very low interest rates (especially compared to | | | | ending up in rising interests rates to home buyers |
| the 10% fixed rate loans of the early 90's). | | | | who are skeptical about buying homes anyway. And, |
| 2. Many of the people who were given mortgages | | | | 5. This also forces lenders to create stricter lending |
| were not qualified to do a conventional deal and | | | | pollicies, preventing potential buyers from buying. |
| were steered into fancy rate gimmick loans to | | | | 6. Which means there is glut of housing hitting the |
| complete the purchase process. | | | | market (failed mortgages) which nobody can buy |
| 3. Nobody (and I mean real estate agents AND | | | | (higher rates and stricter lending policies) which means |
| lenders) was looking out for the home buyer's long | | | | the prices of homes is going to be driven down |
| term legal and financial interest... no, they were only | | | | possibly, very sharply. Which means, |
| interested in earning money on commissions and | | | | 7. People will lose equity in their homes with a |
| lenders fees. | | | | diminishing capacity to refinance or sell them. Which |
| 4. Many people were "over sold" on houses they | | | | means, |
| didn't need and couldn't afford under the guise of a | | | | 8. Real estate investing loses it's allure and the |
| "hot real estate market". The truth be told, when | | | | market begins to stagnate which puts pressure on |
| you hear about any "hot market" at the retail level, | | | | the economy and inflation, which in turn; |
| you can bet your bottom dollar that "market" has | | | | 9. Keeps interest rates moving higher which causes |
| already begun to "cool" or, you wouldn't be "hearing | | | | business to slow and that, |
| about it"... One thing is for sure; the real estate | | | | 10. Causes layoffs and job losses, which causes more |
| agents made their money, but did the lenders? | | | | failures in mortgages and repeats the whole dirty |
| Maybe not... You have to understand how the real | | | | mess again. |
| estate and financial industry is set up to understand | | | | 11. And what about those lenders who are holding on |
| the impact this could have on the economy. So here's | | | | to all those repossessed "low interest" homes? If the |
| a real simple crash course: | | | | rates go higher lenders will be holding on to vacant |
| | | | homes, with low interets rates and no buyers. Their |
| 1. Home loans that are written up at the lenders | | | | money wrapped up in low interest failure in a high |
| office are sold on what is known as the "secondary | | | | interest market- a double whammy. I am not an |
| market" which is basically composed of very large | | | | "economist "but I am a "commonsensesist" and I fear |
| mortgage warehousing companies that buy blocks of | | | | we are just beginning to see the beginnings of a |
| mortgages say, in 10 million dollar blocks at a time. | | | | very bad economy on the horizon, a recession or |
| Basically, warehouse organizations are buying | | | | maybe even a depression. Think about it: We are |
| mortgages from banks and mortgage brokers, | | | | losing our industrial base to China, the real estate |
| bundling them up and; | | | | markets are going in the tank, durable goods (like |
| 2. Selling blocks of mortgages to Fannie Mae who | | | | auto manufacturers) are reorganizing and laying off |
| utilize investment bankers and stock brokers to sell | | | | to avoid bankruptcy, the war, illegal immigration |
| "mortgage backed securities" to the investing public. | | | | invasions, low paying jobs, an economy specially |
| The securities are more or less guaranteed by | | | | tuned for the rich... Put it all together.... |
| statistical fact that people pay their mortgage over | | | | The rich get richer, the poor get poorer and the |
| everything else. So, as people pay on the loans, the | | | | middle class is disappearing. |
| warehousing companies collect the fees, forward the | | | | Do you want my professional opinion? I would hold |
| balance to Fannie Mae (for example) who disburse | | | | off on buying a house for awhile. I think you are |
| dividend payments through the investment network | | | | going to see some real deals in the months ahead. |
| to support the mortgage backed securities game. | | | | |