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What the Sub-Prime Mortgage Meltdown Means to You and Me - 2007-09-08 |
I am not an economist. I earned a C in my sole economics course at Emory College, when I studied under Dr. William Shropshire. So I will not pretend to give you an economic explanation of the recent gyrations in the mortgage industry and their co-conspirators on Wall Street.
But I have been involved in the residential real estate business in Georgia for over thirty years now, and my tenure has given me some insight into market fluctuations.
And while the media would have you believe that recent changes in the sub-prime mortgage industry are leading inevitably to an economic disaster from which mankind may never recover, I would submit the following statements for your consideration:
1. The stock market goes up and the stock market goes down, and no one yet has been able to accurately explain why. The volatility of the stock market isn't new, and we shouldn't be surprised when it happens. This is a normal and natural part of the capital system, and certain stocks fall out of favor while others come into favor. This is not unusual, and it's OK.
In addition, my friends who study the stock market tell me that the market hates uncertainty, and that the lack of liquidity for the resale of non-conforming mortgage loans has created uncertainty.
Until that liquidity is restored, those who hold non-conforming loans as investments are having difficulty determining exactly what those investments are truly worth. And until that difficulty is resolved, fewer investors than in the past are willing to invest in these types of loans.
2. The interest rate you pay on the mortgage you seek is based on the risk of default that the lender must accept. That concept is called "risk-based pricing," and it is why lenders rely more and more on the applicant's numerical credit score rather than traditional debt to income ratios.
However, the lenders who approved the sub-prime loan applications knew that these borrowers were, for various reasons, not able to qualify for traditional loan products. That's why they were labeled "sub-prime."
Their very name was an obvious indication of the higher risk that the lender was being asked to accept, and if the lender failed to take this risk into account at the time the loan was priced, it is certainly no one's fault except the lender.
And if the lender packaged a number of these loan products together and sold them as a financial security on Wall Street, then it was the responsibility of the ultimate investor to discover the actual degree of risk being undertaken.
3. The loans in question are almost all totally secured by residential real estate with a fair market value equal to or in excess of the amount of each loan. And while it is possible that the value of some homes has declined over the past several years, it is a fact that home values nationwide have not yet shown any major decline.
Thus, we should remember that if the lender forecloses on the home and takes ownership of the property, it will eventually sell that property at some price, and that the proceeds of that sale will be used to offset the loss by the lender. The bottom line here is that it is almost impossible for any lender in first mortgage position to suffer a complete loss. It is much more likely that the ultimate investor will eventually recover between 70 and 80 percent of their investment.
4. The loans we are all so worried about represent an extremely small fraction of the overall portfolio of loans made on homes in America today. In fact, according to the most recent data from the Mortgage Bankers Association, the rate of loans entering the foreclosure process is far less than one percent, 0.58% in fact, and most of that is concentrated in seven states, not including Georgia.
According to Doug Duncan, MBA's Chief Economist, "The percentage of loans in foreclosure would be well below the average of the last ten years were it not for Ohio, Michigan and Indiana, and the rate of foreclosures started nationwide would have fallen were it not for the big jumps in California, Florida, Nevada and Arizona. Those states have special circumstances that do not reflect what is happening in the rest of the country."
5. The overall economy is doing pretty darned well right now. Corporate profits are strong and unemployment is low, personal income is up and capitalism still works.
Some residential markets, particularly in the seven states listed above, saw prices rise at unsustainable rates during the early part of this decade. Those over-heated markets needed to take a break, and the riskiest loans made in those areas are experiencing the highest rates of delinquency and loss.
In contrast, home values in Georgia have increased slowly and steadily over the past decade, and now represent some of the best values available on a comparative nationwide basis. I expect that to continue.
6. For most Americans, owing their own home continues to be one of the best investments they ever made. I believe that won't change.
I do believe that lenders need to exercise greater control over their underwriting guidelines and their loan officers involvement in fraud, and I believe that's exactly what will happen.
Once lenders get their procedures for loan approval in line with prudent industry standards, investors will once again evaluate their loans for risk and invest as they deem appropriate. That's the way the market works.
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Upcoming Events
BUYING FORECLOSURES IN GEORGIA
NEW for 2008: Bank-Owned Home Bonanza
This seminar has been updated and revised for 2008 to reflect the dramatic changes in the Georgia foreclosure marketplace. We are literally facing a flood of foreclosure properties, and there is profit to be made in each and every one of these homes.
Whether you want to build a portfolio of homes for your retirement or you simply want to find a better home for yourself and your family, this program is for YOU.
LAST CHANCE THIS MONTH!!
• Saturday, Oct. 11th, 2:00 P.M. until 5:00 P.M. - Renaissance Waverly Hotel in the Cobb Galleria
This COMPLETELY NEW SEMINAR examines the roots of today's foreclosure meltdown and explains how you can take advantage of this opportunity in your spare time.
Advance Tickets: $69; bring a friend for an additional $30.
Couples share materials.
Detailed information available under the “Seminars” button
This course approved for 3 hours of Continuing Education credit by the Georgia Real Estate Commission.
The Real Estate Investor's Institute will be held at Emory University on
November 22, 23 & 24, 2008. Make plans to attend.
Detailed information is
available under "Seminars."
This course is approved by the Georgia Real Estate Commission for 12
hours of Continuing Education Credit. Agents must bring license number.
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