I just ran across an interesting story in the the Wall Street Journal online which highlighted a poem written by Cameron Crise titled "Broker Joe". It is a poem written like Green Eggs and Ham that was inspired by the financial turmoil which started back in August and continues today.
You can read the WSJ article here and read the full poem here.
Taking a look back through the events of this year, there is been numerous stories across the US, so we look at the top stories of 2007..
#5 - Dow Tops 14,000 - Hard to imagine at this time, but back in July and again as recent as October, the Dow broke above 14,000. Volatility remains in the markets.
#4 - Fed Moves - Since August 3, the Fed has been battling the worst credit crisis in nearly a decade and has moved to cut rates three times in an effort to bail out the markets and to keep the economy on track. Our opinion is they over reacted as inflation already ticked higher, but time will tell for sure.
#3 - Toy Recalls - Recall after recall came out about Chinese products that contained lead-based paint, illegal pesticides, electric shock risks, and even laced with the "date rape" drug. And most came just in tome for Halloween.
#2 - Record Oil Prices - While oil has backed off a little, we are still feeling the increased expenses in our wallets. A lot of the increase came from the falling value of the dollar, along with fears of dwindling supplies and increased demand in growing places such as China.
and the #1 story, yet again...
#1 - Housing Contagion - Mortgage defaults, increased foreclosures, failing debt across the markets. Between the US and Europe, more than $100B have been written off after downgrades occurred. Add to that, we are likely to continue to see write off into next year. The effects are spilling over into other areas of credit, including commercial paper. 2008 will likely see increased defaults in credit cards, auto loans, and more.
There you have it, no surprises as far as we can tell. What does 2008 hold? Who knows, but we can expect increased legislation of the housing industry, mortgages in particular, for good or for bad. We can also expect to see more foreclosures, credit card defaults, and basically continued write offs for the foreseeable future.
Where do I see the Florida mortgage and real estate markets in 2008?
I see a slow improvement coming as reality sets in, particularly in South Florida. I don't see a recovery per se. Many in the real estate industry, both realtors ad mortgage brokers, will be bowing out under the financial strains of staying in business and not adapting to the new marketplace. That can be good news for the consumer as most who fall out will be those you wouldn't want to work with anyway, though I am sure a few will be.
As for those who work in the industry, if you can adapt and persevere, you will be rewarded. Slowing markets do not mean your business needs to slow also, rather it can actually increase in these times. As for me and Solid Rock Mortgage Corporation, our plans are to grow in 2008 and beyond, still meeting our goal of being #1 in Broward County for mortgage planning services by 2012!
"The proposed rules, approved in a 5-0 vote by the board,
are geared to providing safeguards to the riskiest “subprime” borrowers, already painfully stung by the housing and credit debacles. The proposal is expected to apply to new loans made by all types of lenders, including banks and brokers. The plan could be finalized next year." - NY Times
I am left wondering why they only feel the need to protect "subprime" borrowers? Why aren't they retroactively allowing these borrowers recourse for loans already made that the homeowner can prove abusive lending practices?
“Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole,” said Fed Chairman Ben Bernanke in prepared remarks. “They have no place in our mortgage system,” he added.
No Kidding. That is an understatement if I ever heard one. But let's look at what he proposes:
So, what is this move really going to do? Mostly nothing.
It really doesn't address abusive lending practices much. Requiring escrows, while mostly helpful, doesn't truly protect the borrower from increased payments, merely helps ensure the lender is protected (makes insurance and tax payments on time). Proof of income may not be enough to meet the normal 2 year requirement and anyone who owns a business knows tax forms do not show "reality", especially when the business owner can legally be aggressive with their tax reductions.
The bottom line is that this is yet another misplaced "Band-Aid".
"Stop the insanity" is the first phrase that comes to mind after reading this
headline. Why? Think about what is truly happening in the mortgage market and where all of this is headed.
Basically, the government is trying to overtake the mortgage market through endless regulation. They feel they must do something or else and are succumbing to pressures to "bail out" a market that was in desperate need of a correction to bring itself back to reality.
But is "over-regulation" what we truly need? Don't take me wrong here as I am all for added regulation which protects the consumer, but when the government steps in, they tend to overdo it. Allowing Freddie and Fannie to go into the Jumbo market, even if only temporarily, is one case in many of how the government is throwing Band-Aids on the gaping wound. Sure it stops the bleeding some, but basically just prolongs death.
Paulson and Bernanke are doing everything in their power to Band-Aid the mortgage market. Bernanke and crew are cutting the Fed Funds Rate and Discount Rates even with inflation showing signs of growing and the economy slowing. He is giving stagflation an "open door". Both are looking for any changes they can make or get other parts of the government to make in order to "save homeowners from foreclosure."
Who stands to win though? The homeowner? Not likely.
The real winners in this game they are playing are the lenders and other financial institutions that are struggling due to their risky lending practices or over leveraged positions on mortgage backed securities. Citigroup, Wachovia, Bank of America, Washington Mutual, Countrywide, the list goes on and on. All are shouldering huge losses and will likely continue to do so into 2008. They "need" the government to do something.
The homeowner's facing foreclosure, for the most part, deserve to be foreclosed upon. While the media and government play that the typical foreclosure is a subprime borrower facing increased mortgage costs due to their payment adjusting, that represents the minority, yes the minority of foreclosures out there. Factor in that the government portrays the mortgage professional that sold them the loan as an unscrupulous one and reality shrinks even further from the truth.
Again, don't get me wrong. There are unscrupulous originators and there are homeowners that truly should be helped somehow, but they are the smallest percentage of the pie.
So, why is the government willing to screw up the entire industry over the few? Well, because that is what they do. They disguise "bail outs" as "homeowner salvation plans". They usually go out of their way to appease the minority groups on an issue, while sacrificing the desires of the majority groups. (Note: I am not talking about racial or ethnical issues here, so don't even go that route in any comments please).
Bank of America came out saying it will set aside $3.3B to cover losses in the fourth quarter. The CEO, Ken Lewis said “While we do not make a practice of forecasting quarterly earnings, I think you certainly can assume results will again be quite disappointing.” That's gotta hurt.
B of A started what other banks decided to follow up with. A slew of losses being shown across the board with Wachovia setting aside around $1.0B and PNC around $1.5B. Washington Mutual is around $1.6B. Others have issued warnings as well.
The most interesting announcement yesterday is that from Morgan Stanley. They came out and said the #1 stock to SHORT is none other than Citigroup. Their analysts are saying Citi will try all kinds of methods from spinning off units to selling funky securities, all of which will dilute shareholder value.
I think it goes without saying that any attempt by the Fed to prevent failure is not working, at least not enough. Throwing money at the problem (yesterday's Fed announcement) moved the markets temporarily, but when reality set in, investors saw through the Fed's attempts.
The reality is that the markets need to work through the issues and move on, but the beatings to the financial companies will continue, at least into the first quarter, if not beyond.
I have been reviewing the proposed bill formulated by Senator Dodd and, once 
again, there are provisions that will screw the consumer more than protect them.
Please keep in mind that I am not against legislation that works in favor of the consumer, but provisions in both the House's "Mortgage Reform and Anti-Predatory Lending Act of 2007" and this bill will actually hurt the consumer by making it harder to obtain potentially the best loan solution for them. Both bills do have some good provisions, but its the harmful ones, such as outright prohibiting Yield Spread Premiums (YSPs) from being used.
In the House's "Mortgage Reform and Anti-Predatory Lending Act of 2007", there was an amendment to allow YSP when used to pay for justifiable fees as part of paying for the closing costs associated with the loan. The Senate's "Homeownership Preservation and Protection Act of 2007" does not allow for that on many beneficial types of loans. There are similar limitations on other types of loans.
When it comes to the use of YSP in the Senate's version, it is prohibited on all subprime and "nontraditional loans". Nontraditional loans include interest only loans, thereby minimizing the access to a proven beneficial program. Strangely enough, for high cost loans, YSP is allowed so long as it is not used to "steer" borrowers into a high cost loan when they can qualify for a better loan. (There may be a few times when these limits will actually force borrowers into the high cost loan).
The Senate version also adds the requirement to escrow for any subprime or nontraditional loan. While for subprime this is a good thing, for interest only loans it is not. Why? Most homeowners who use the interest only loans are financially savvy and would be better off waiving escrows. Another limitation that would hurt many homeowners.
Limitations on low and no documentation loans may be excessive. In fact, it leaves the Federal Reserve in charge as to what is deemed appropriate and they will likely not allow much. This puts severe strains on small business owners and commission based workers that need the stated income programs to qualify.
So, once again the government is going after implementing legislation that will ultimately harm the consumer. Also, as I mentioned before, there are good provisions, even many aimed at limiting mortgage brokers from screwing their clients for money which I agree with. The points I made here are targeting provisions that will do more harm than good for the American homeowner.
The foreclosure stats released last week showed a lot of gloom, but also a different picture than what is portrayed in the media and by the government. Nevertheless, we cannot ignore some of the facts, and that is foreclosures are taking the market over.
If you are driving around South Florida, you have definitely seen a property being foreclosed on, even if you didn't realize it. In the state of Florida, 2.19 percent of outstanding loans are in some part of the foreclosure process.
Miami-Dade County 20,475 foreclosures filed, or roughly 1 out of every 32 homes. That's up nearly 10,000 from last year. Broward County wins the race in South Florida, with 20,812 or roughly 1 out of 30 homes.
So, with this many homes, chances are your neighbor (or neighbors) are in foreclosure. Now, don't get me wrong, not every foreclosure that is a subprime ARM holder that got screwed into a bad loan by an unscrupulous mortgage broker.
For the real estate investors out there, this may be the best opportunity you ever get. Once this economic cycle is completed, appreciation will return and affordability will have likely returned as well.
"The rate of loans entering the foreclosure process during the
third quarter, as well as the percent of loans in the foreclosure process during that time, were at the highest levels in the history of the Mortgage Bankers Association's quarterly delinquency survey, the group reported on Thursday."
That is how the article in MarketWatch started. This comes as no surprise to most readers as I have mentioned that foreclosures were going to get worse. I have also mentioned that it wouldn't be just a "subprime" thing.
Guess what. It isn't. The more interesting numbers hidden in the new release is that of the percentage of prime loans, you know those with credit not worth screwing up.
"Adjustable-rate loans are performing "much, much worse than their fixed-rate counterparts," he said. Subprime ARMs accounted for 43.0% of all new foreclosures during the third quarter, even though they make up just 6.8% or all loans outstanding. Prime ARMs made up 18.7% of the foreclosures started, and make up 14.5% of all outstanding loans."
First off, if Subprime ARMs accounted for just 43% of all new foreclosures, what about the other 57%? Since virtually all subprime loans are ARMs, that would leave the vast majority, if not all, as Prime loans!
Let's also look at the numbers and find another hidden gem. Total ARMs, including Prime, represent a total of 61.7%. That means that over 1/3 of all foreclosures, 38.3% in fact, are fixed rate mortgages!!!!
That is a far cry for the facts the media and the government have been portraying. They are painting the picture of a homeowner being foreclosed on because they have bad credit and are in an adjustable rate mortgage that will reset beyond what they can afford.
As is typical, reality is different as we can clearly see, around half actually have (or had) good credit and nearly 40% are in fixed rate loans!!!
Some of you may have been wondering why I have not mentioned the fact the the whole mortgage mess, etc. has all but destroyed the fund, causing them to freeze withdrawals until the "run on the fund" stabilized. They are allowing some withdrawals, but to whom and how is unknown and doesn't really matter.
Why have I not thrown myself over this one?
While it is big news, it is a rather small fish in the pond. Although it was a drop that signaled there would be more "ripples" felt across the country, as was we have seen in places like Montana. Many people are scared about where there money is being invested and would rather throw under the mattress instead.
That is probably the dumbest thing to do, unless you have a mattress in Europe or other location where the currency is perceived to still have value.
So, I have decided to focus more on the "bigger fish" as I move forward.
The economy runs in cycles and that is a healthy thing. When the government 
steps in to try and "fix" it, that is a bad thing as it prolongs the process. Why doesn't the government just let it go, stop screwing around with the economy trying to fix things and just let it run its course?
Politics is politics, but politicians need to stop trying to "look good" and focus on reality. Of course, it isn't just the politicians trying to fix things either. What about Big Ben and the gang, making statements letting the market at least believe there is another rate cut coming?
Why can't we just let things work through the cycle, so the cycle can complete itself and start moving in the opposite direction?
That's right, it may get worse, but it always ends up getting better down the road, but only when the cycle has a chance to complete itself. It is all part of a healthy economy. Screwing with it only makes things worse, as we are seeing now.
I could go on and on, but I think you get the point.
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