What Does Wall Street Bailout Mean To Main Street?

September 24, 2008 at 2:01 pm · Filed under Headlines, Presidential Election, Residential, The Mortgage Market

With so many opinions about what is happening with the economy, what does this mean to you?

Wow, what a week.  There is no shortage of fireworks on Capitol Hill as the Senate Banking Committee continues to throw Fed Chairman Ben Bernanke and Secretary of Treasury Hank Paulson on the grenade.  The one constant that continues to be thrown around by members of the committee is that this unprecidented measure will “cost” tax payers $700 billion.  I am afraid that this term is being lost on the committee as it is also being lost by tax payers and citizens due largely to a misunderstanding of what this “bailout” actaully involves.

Let me qualify this by saying that I am a very large opponent of gevernment intervention at any level.  There is nothing that the government gets involved with that makes anything cheaper, more effective or more efficient.  That being said, we have reached a monumental point in the financial markets where intervention is necessary to avoid a total collapse of the financial markets that is nearly immeasurable by most people alive today.  Unless you are in your 80′s, it is unlikely you can truly appreciate what affect the depression had on this country (myself included).  The argument being made is that tax payers are being asked to foot the bill for mistakes made by people and organizations that they had nothing to do with, and to a limited extent that is true.

What is really going on is a total lack of faith in the system due to the unwillingness of financial institutions not only to lend money to consumers, but also to each other to keep the system fluid and capitalized.  When using the term bailout, you must see the bigger picture of what is actually going on.  The Fed and Treasury Department are proposing to the Senate Banking Committee that the government purchase certain mortgage backed securities from financial institutions that need help to liquidate these securities to continue in business.  If you own a pizza parlor, you can only remain in business if you sell pizzas for more than the cost to make them, use the proceeds to buy supplies, and repeat the process.  The same is true in the financial industry.  Banks can only lend money after taking certain securities, liqudating them in the open market, recovering the cash, and lending it again for a profit.  This is a highly simplified version of what is happening, but it has very complicated and wide reaching implications in all of our lives.

Some of these securities are owned by your pension fund, or your local municipality, or even your investment banker (as we have already seen with Bear Sterns and Lehman Brothers).  While it is pertrayed in the media and misunderstood by elected officials that this is a $700 billion line item expense to the tax payers, that in fact is not true.  It is actually the government purchasing assets with the intention of holding them and selling later.  The proposal is also suggesting that the securities be purchased in a reverse auction fashion where the banks most desperate will sell first at the lowest coupon rate, and as the value rises, the market will dictate what is reasonable to sell for each individual company.

In the end, the actual cost to the tax payer will be much less than $700 billion, in fact, it will more likely be a fraction of that.  The result of this action would be to open up a logjam in the system allowing institutions to become more liquid, be able to lend more money to consumers, and increase consumer confidence in the economy as a whole.

As you sit in Smallville, USA and wonder why you would go along with such a deal, be aware of the fact that farmers who need short term financing to get their crops to market are affected.  Car companies that employ thousands of people to build and sell cars are affected.  And, small businesses that need money to expand and grow and create more jobs are affected.  This may have originated on Wall Street, but there is a very real impact on Main Street that could create real problems if it is not done.

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Where Do You Keep Your Money Safe?

September 18, 2008 at 10:30 am · Filed under Affordable Housing, Did You Know?, Headlines, Ike, Perdido Key Condo Deals, Residential, The Mortgage Market

In these historical times in the financial markets, how do you know that your money is protected?

Everyday there is a new headline about some other “sky is falling” scenario.  It was only a week ago that history was made when the government stepped in and took over operations of Fannie Mae and Freddie Mac, but that is old news now.  This week it was the nations largest insurer AIG being given an $85 Billion loan from your tax dollars to help keep them out of bankruptcy.  But hidden in all of the negativity are shining pockets of positive news.

If you ever watch CNBC, you may know that Jim Cramer likes to say “there is always a bull market somewhere”, and he is right.  In the constant yin and yang of the financial markets, where there is a loser, there is also a winner somewhere, you just have to know what to look for and where to find it.  For instance, if you bought into gold earlier this week, you are no doubt celebrating as the gold market had the largest dollar gain in history this week.  Equally, as confidence fades in the stock market, investors must forge ahead and put their money somewhere, and guess what just started looking really good…..real estate.  Thats right, real estate.  The dirty word that people have been scouling at for months just became one of the best places to put your money.

Think about it, if you have $1 million in the stock market and you don’t know if you will wake up one day to find that your top holdings are out of business, your money may be better served in a tangible asset that you can see, touch, get a tax break, and live in (or rent out).  At a time when real estate is at historically low prices, you could be getting in at the very beginning of a new bull market.

I find it interesting what an affect the media has on the markets.  They seem to give you just enough information to instill a panic without regard to how people will react.  I know that the AIG issue is big news, but did you know that there are 1000′s of people without homes or jobs in Galveston, TX after Hurricane Ike virtually wiped the town off the map.  Chances are pretty good that you didn’t because no one in the news is saying a word about it.

So back to the topic at hand, is your money safe in the bank?  Yes, if it is less than $100,000 per depositor per institution.  Is it safe in stocks?  I guess it depends on the stock and your level of exposure.

Even if you take away my obvious bias towards real estate (because I am an active mortgage banker), do your own home work in your local market to see if I am right.  If you haven’t looked lately, you might be shocked at the deals available now.  I my area of the Florida Panhandle, there are gulf front condos that can be stolen for prices that compare to 4+ years ago.

Good luck to you, and tell me how things are in your local real estate market.

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LIBOR Index In For A Bumpy Ride

September 17, 2008 at 9:53 am · Filed under Foreclosure Help, Headlines, The Mortgage Market

If you currently have an adjustable rate mortgage tied to the LIBOR, you may be in for a shock at the next adjustment.

The LIBOR (or London InterBank Offering Rate) is the rate at which banks loan each other money.  The reason this type of loan became so popular a few years ago was that the index was typically lower than other prevailing indecies used for calculating rates such as Prime or Treasuries.  Unfortunately, because of so much uncertainty in the financial markets regarding the ability of one bank to come through on their paybale obligations, banks are pushing this LIBOR much higher to justify the risk associated with the uncertainty.

Because the LIBOR is on the rise, the next time you have an adjustment coming due (many LIBOR loans were done on a 6 month adjustment), you may be in for a real sticker shock.  Combine that with the strength in long term fixed rates, and you may be looking at the perfect scenario to refinance your loan into a long term fixed rate and stop worrying about the news on a daily basis.

There are a few snags in this plan to be aware of.  First, the value of your home is likely not what it was at the time of your last refinance, so unless your loan was done at a reasonably low loan to value ratio, you may not qualify for a refinance.  Get an estimate of the value of your home for free at www.Zillow.com.  When using Zillow, be aware that the acuracy of the information is somewhere around + or – 10% (based on my own experience).  If you are unsure, I may be able to help you sort through it.  Also, Zillow is notoriously innaccurate on waterfront homes, or homes where a significant portion of the value is based on the location.  All of those disclosures out of the way, Zillow can be useful and fun to use.

The second snag in the plan is the verification of income.  During the same time that LIBOR loans were so popular, stated income loans were “all the rage”.  As long as you had good credit and the right asset profile, you could state your income on the application without the need to verify it in writing.  In the industry these are referred to as “liar loans” because historically, the number given as an income figure more acurately would be filed in the fiction section of the book store.  The days of stated income loans are officially dead.  While there are still a few loan programs out there that offer the option to not verify income in exchange for an increase in your rate, what is not widely advertised (and many inexperienced loan officers don’t even know) is that when your file goes to underwriting, they will pull an IRS form 4506 tax transcript.  This means that the underwriter is going to see the income that you file taxes on whether you provide them or not.

Even hard money lenders, notorious for turning a blind eye on income in exchange for asset based lending, are now turning heavily towards verifying “the ability to repay”.  Contact me to find out if a refinance on your LIBOR adjustable rate loan is the right thing for you and your family.

www.SteveRussellOnline.com

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