The Crisis of Credit Visualized continued.....

Video - Courtesy crisisofcredit.com

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I came across this video which illustrates the cause of the banking crisis and stock market collapse. I found it very informative and easy to understand with excellent graphics and commentary. Video - Courtesy crisisofcredit.com

As an investor I hope I can always learn from my mistakes and help others. I hope together we can all grow stronger moving forward.

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There are many risks when it comes to property investment as a business. I think sometimes people, especially investors forget the steps involved when obtaining a loan and how this process may open them up for risk. There are many concepts to understand mostly because the bottom-line is determined by capitalization (CAP) rates, return on investments (ROIs), and other net operating incomes.

It makes sense that people overlook the smallest detail when financing a property. It doesn't really matter "why" the loan is needed, if you are seeking a conventional loan from your neighborhood bank or turning to private lenders or hard money; it is still very important that you pay careful attention to the loan you are being offered. I understand you are concerned with flipping the property as quickly as possible; but in doing so you are not as attentive to the type of loan. And thus you find yourself in high-risk situation. Often times brokers may steer you into high-risk deals since they may have pegged you to be a risk-taker.

This opens you up to a different class of loan and areas of predatory lending practices which may incur high fees and other terms or conditions that are not always explained up front. Sometimes loans that allow you to flip properties are called rehab loans as they use hard money via private lenders. This not only means steeper interest rates but an area of lending that is not strictly regulated by the federal or local governments. These hard money loans only work to your benefit when they can get you out of a deal quickly. In other words, these loans only serve the lender because of the amount of leverage that increases the return.

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 This current talk of financial bailout suggests that as a result mortgage rates will fall allowing a surge in home buying especially for first time buyers.  Still one must wonder how long this will last but also what are the long-term impacts for the housing market?  Right now it feels like the lending industry is distressed but this may not be true for very long.  The banks at risk of failing just need to time to recover and it will actually be consumer confidence that drive the economy back to being fruitful again.

There just seems to be a lot flux in the market, organizations don't know if they are coming or going.  This is a period of acquisition and consolidation.  Lehman Brother's is on the auction block, AIG's failure has brought the issue of bailout into the limelight and Bank of America, of course, will remain standing, buying up new pieces for their vast umbrella like Merrill Lynch.  This week has been historic and shocking for the experts even to say, they don't know what should happen.  That's tough.  While so many people grasp this concept, many are putting their ducks in row and wonder if this is a right time to even think about buying a home or new car.  I believe people are hesitant this week but this will change once there is direction and leadership toward resolution.  This is what some experts have to say about the future of home buying:

How does the latest fallout from Wall Street influence mortgage lending rates?  Well, let's take a look.  We can only hope.  In the interim rates will more than likely go down because there is a lot shuffling going as the dust settles and investors look for safety nets in this uncertain market.  Upon many experts advise, this is a time to put our money in real estate investment or income property.  As of last week the 10-year notes went down which means that the yield also decrease but this makes for new opportunities.  Experts expect mortgage rates to follow this trend because historically they usually follow suit.  Expect rates to drop further as more news brakes.  Just within the last week Bankrate.com commented that the 30-year fixed rate was 5.78% down from 6.08% of the previous week.  Just to compare, this rate was 6.5% in August.

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 For a while now, many can spectulate the trouble started at the tail end of 2006 with the mortgage industry busy, the American economy has been struggling, facing uncertain times.  Many understand the historic significance of last week but the implications of a federal bailout has yet to hit home.  With the annoucement that the Federal Reserve will aid the ailing AIG with an $85 billion rescue package, the details seem murkey as more politicians throw in his or her two cents of how this bailout will work and impact the economy.  While the bailout does not favor AIG, the company must hand over 80 percent control of the organization's future business dealings, this new bailout and the status of future bailouts remains in the balance and hands of the federal government who stepped into save the mortgage giants Fannie Mae and Freddie Mac not too long ago with a $100 billion package.  Where this differs and many fail to see a need to save AIG is that Fannie and Freddie were already government controlled and sponsored by federal dollars.  Why should the federal government step in and save a stockholder owned company?  What I am trying to say is that this bailout of finance giants has been a popular trend, starting with a $30 billion loan to Bear Stearns in February.  It is a trend we will see more of and possibly a part of the Federal Reserve's strategy to save the American economy.  I believe many who are struggling to make ends meet, living pay check to pay check, the working class and even the upper class, when push comes to shove and with a cold winter on the way, wish that the Federal Reserve would give the American people a loan.  That $300 incentive check just did not cut it.

While AIG must pay the Federal government back or risk losing control of its interests, many are concerned with the level of government involvement and bascially, the bottom line, who really will be paying for the bailouts?  Is Washington really to blame for this mess?  What about corporate accountability and the management of these organizations?  Something is rotten in Denmark as Shakespeare wrote in Hamlet.  Really it does not add up.  It is cause to worry of how this can be avoided in the future but also how this will impact the American people over the years to come. Many will argue that this has been a long time coming that part of the issue has been a faillure to tighten lending practices and that the subprime market has lead to the downfall of the whole market.  Truly companies like Countrywide should have known better instead of living high on the hog.  We could have avoided a lot of trouble today with bad loans.

So should the federal government step in and save companies riddled by bad behavior in the market place?  This whole crisis begins and ends with the practice of predatory lending and we've known it since before the mortgage buble burst.  As said above, not only Countrywide but other banks allowed their lending practices to be too flexible allowing many under qualified borrowers to purchase items like homes and cars.  Many brokers pushed such products on people who otherwise should not have been buying in the first place.  Many did not look at the full picture and mainly the issue of repayment.  Now the market is suffering due to underperforming loans or bad loans.  Still the bank is at fault, they should have never allowed such practices to continue but they were leveraging on the risk involved as long as the portfolio was performing well, the bank was making money on subprime products.  Now the current situation prevents this demographic of people with blemished credit from establishing any credit and only the prime customers (A & B paper) will prevail.  Many will have to learn to live without or forget about keeping up with the Jones because there will just not be any loans out there for these customers.  It is unfortnate because this takes aways from sales people's commission salaries and many people of these professional will be out of work.  Truly this is why so many people have never believed in the concept of credit in the first place.  It creates a vicious cycle. 

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Over the past five weeks, mortgage rates have dropped about half a percentage point, according to a survey by mortgage research firm HSH associates - this comes after a May 23 confirmation that the average rate on a 30 year fixed-rate loan was 6.02 percent, a figure that jumped to 6.55 last week, while the bearer of an average jumbo loan suffered a crushing 7.12 percent rate. The typical 5/1 adjustable rate mortgage (ARM), a mixture of conforming and jumbo loans - also happened to jump half a percentage point.

Being presented with enough facts and figures to make even the savviest financial analyst feel a bit panicky is all well and good, but what does all of this stomach-churning monetary mumbo-jumbo actually mean?

Despite the tangled web of effects, the cause is fairly simple: our fear of inflation is driving the American rate increases. While we are not technically in a recession (read: yeah, we're kind of in a recession, even though Dubya might not want to admit it) due to the shred of life to which our economy is tenuously clinging, panic is still widespread. And to make matters worse, the Federal Reserve announced it would no longer slash interest rates - in fact, it may start raising them, due to the abundant fear of inflation. Fighting inflation with the threat of inflation? With that axe swinging over our fragile heads, what options are Americans left with?

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Not only can your credit history be found in your report, but it also contains personal information that should remain confidential, like your SSN, full name, current address and tenure, and past addresses. 

 A credit report's main purpose is to list all of the financial activity for any one person, encompassing all or most of their lives.  Any financial relationships, be it a credit card, mortgage on a house, HELOC, student loans, and car notes.  It may even list any layaway accounts that are open.

For each of the credit accounts, the credit report also details information about outstanding balances and the high-water marks of previous balances.  Payment history, which may be the most telling piece of information, is also provided to those organizations that are receiving this report.  Those with exemplary credit payment history will be acknowledged in the report, as well as any blemishes like late payments and the circumstances pertaining to late payments.  If the credit account is either current or behind schedule, the credit report will reflect its current status.

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For those that negotiated an ARM, the mortgage knife cuts in two ways: home values are plummeting while mortgage payments are jumping up. This could result in default when payments exceed the owner's ability to pay, but then the resale price is not sufficient to cover the original mortgage to begin with. So, that's how we got to where we are now.

Is there a way out of this mess? The easy answer is, maybe.

The current credit market is by no means as favorable as it was just a few years ago. Lenders were much more prone to making high-risk loans, which endangered not only their business but the borrowers as well. In those boom times, teaser rates were the hook used to entice borrowers into mortgages that appeared to be good in the short term. This was all put in the positive light of home values, which were believed to keep rising. Borrowers were betting on an uncertain future that seemed to be bright. Now that future is here, and it is proving to be more difficult than the borrowers or lenders could have ever imagined. So now those same borrowers are seeking ways to alleviate the mortgage crunch, but are finding few options. What they need to understand is that through some patience, determination, and the ability to reach out to those that can help.

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