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.
Although Wall Street seems to have rebounded in recent days in response to the Congressional approval of the $700 billion financial-system bailout last week, there seems to be continued concerns found amongst financial professionals, who are concerned with the continued pall of recession over the American economy. The main concern remains focused on government ownership of the American banking system. Will this end the market's paralysis or is it just another bad idea from a failed administration?
Let's face it the average American person does not concern himself or herself with the goings on of Wall Street. Until recently this just did not impact their lives unless they were savvy investors. The average American mainly concerns themselves with the bankers that lend the money out. We are a credit minded country. So now what to do when the credit market folds? Banks have had no choice but to limit the amount of credit that can open for people but also the guidelines for credit lending have tightened incredibly so. The subprime market, once open for business is no longer available. What else has happened for the banks is the widening spread, or surcharge, that banks must impose on short-term loans to other banks. This has increased over the last year from 0.65% above the cost of funds to an exorbitant 4%.
While the symptoms of the economic crisis and virtual breakdown have been evident for quite some time, since the market became deregulated in 1999 and allowed less government regulation, the current prognosis remains unseen even by the country's foremost financial experts. Many can play the blame game like a pro and point the finger at bipartisan investments in the mortgage industry, specifically the borderline predatory lending practices found in the subprime market. This was all very hush-hush, as this knowledge was not readily shared with the common everyday investor.
During this time of financial uncertainty as giant powerful cornerstones of the American banking community fail, you have to wonder, is my money safe? What happens if my bank is no longer doing business? Should I take my money out? What about small, regional banks and even credit unions? Are they immune or will they suffer the same fate? Should I worry about my long-term investments? Is it finally time to get organized and figure out my finances?
For months now, the American financial backbone has been a sinking ship, headed toward a crisis beyond anyone's experience and description because not even the Great Depression can compare. Many say we have been in a recession but there have been signs of a Depression for a while. Even such financial leaders like Bear Stearns, IndyMac bank start to fail and powerhouses like Fannie Mae and Freddie Mac need federal assistance; there is something rotten here. This is not to mention the Lehman Brother's bankruptcy and the proposed bailout of $700 billion bailout, which was initiated by American Insurance Group or AIG. No wonder our heads are spinning; we don't know if we are coming or going. Everyday on the news it is something new. People are taking to Internet financial pages like MSN Money and sending emails to financial experts across the country for advice.
Oprah has Suze Orman on her show as a way to elevate the worry but still there are very few answers and still more questions. We can take a moment to answers the questions but you also must keep in mind, the answers are changing for from minute to minute.
How can I tell if my bank will fail? Well you really can't. There's no easy way to know and I'm certain the bank will try to ease your worries. You should look at indications within the market because there is no a hot list of banks going bad. The Federal Deposit Insurance Corp does not publish one. Furthermore, according to the American Bankers Association many banks rebound and recover so quickly that it's next to impossible for them to produce a list.
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.
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.
Many people do not understand the liquidity of real estate transactions and are often lead to believe that the transaction hinges on the accessibility of cash money. In this day and age of a troubled economy, few have such means. The reality is there are other benefits to explore when embarking upon a real estate transaction that has less to do with cash funds and more to do with the existing loan situation. Many homeowners do not see their existing loan as equity building over the years or that their home could work favorably on their behalf. So many people think with lack of cash, real estate transactions don't get done but there is flexibility in creative thinking.
This is where the know-how and knowledge of real estate professionals and investors must apply creative thinking to the every day challenges of doing business in such a slow market. While there is creativity thinking and finance involved, there is also the ability to have a tough skin that sets these professionals apart from others.
Many real estate investors and seasoned realtors will tell you that access to cash is not always the deciding factor in all real estate conveyances. In fact many layman do not see the notion of converting liquidity into part of the equation as being the talent for translating assets into working for the customer as an added benefit.
These professionals look at the positive aspects of the deal, which starts with ownership of property and these highlights remain beneficial to the success of the real estate transaction.
There are different ways to structure real estate transactions that involve seller financing to benefit all parties. Of course the seller has concerns of protecting their property and the need for regular repayment. The following scenario explores this option in detail.
You know that your local market has many rental properties in the inventory and you have found one that meets your needs. You will be purchasing from a seller who is greatly motivated because the property has been on the market longer than a year. The property has an existing long-term fixed rate first mortgage with a balance of just $100,000. Your plan is to buy the property, rent it out and hold onto it as a long-term return on investment property. You know that the home is worth about $150,000 and the seller has it priced at a discount of $120,000.
The offer is as follows. You want to put $5,000 in cash as a down payment but also allow the seller to keep the title in their name with their first mortgage with only a balance of $100,000. The seller must also consent to taking a second lien loan for the remaining $15,000. This transaction may seem like it only benefits the buyer and the seller is left with all the risk. However due to the current lack of home sales in your area, the seller is motivated to continue the arrangement of the sales price, your down payment amount, and also is okay with you taking over the monthly payment for the first lien mortgage because they want to see the property sold in the long run. What bothers most sellers about this type of transaction and what makes it risky for them is that you are not assuming the existing loan. It still remains in their name but the title work protects them for your default. Still there is the concern of the loan remaining in their name and the $15,000 second lien is also risky for them should you fall into hard times but the goal of the sold property remains a common interest for all parties.
The so-called days of the mortgage boom are over causing a certain amount if disbelief among industry professionals. Like a bad hangover from Saturday night wild party, those who gained from historic low interest rates and flexible lending products that spawned the real estate boom at the turn of the millennium, are now slowly waking to reality. The once profitable sub-prime market is now close to extinction as many institutions known as great powerhouses are no longer in the business to originate loans. While Wall Street may have had a say in rating these companies poorly, the ones who catered to a specific clientele should have seen a shift coming especially when the funding is no longer available.
So what is the big deal anyway? All this hoopla has many asking, what is a subprime loan anyway? How does this influence the mortgage industry? So okay, a subprime mortgage is a real estate loan given to a consumer with less than perfect credit and little or no down payment available. One must keep in mind the majority of loans in a financial institution's portfolio does not consist of these types of loans but during the mortgage boom, many consumers took out these types of loans as a means of affording the American Dream of homeownership. These loans broke down the barriers to home ownership because of their flexible lending parameters. What this has now lead to be a marketplace upside down in loans not considered "A" paper but B, C, D and F translating into a high-risk venture? As home values have risen so has the risky nature of these loans still being unpaid or falling behind.
So how did the bubble burst so badly, one is also wondering? As subprime became a more popular loan product, so did the practice of selling it to the consumer become more flexible. More and more lenders approved borrowers with not only less than perfect credit (small blemishes) but also those with poor track records including larger debit issues like previous foreclosure and automobile repossessions. What further compounded the issue is the lenders sales device of enticing the poor credit customer by offering homeownership programs with minimum documentation needed known as "stated-income" or "no doc" loans.
Although Wall Street seems to have rebounded in recent days in response to the Congressional approval of the $700 billion financial-system bailout last week, there seems to be continued concerns found amongst financial professionals, who are concerned with the continued pall of recession over the American economy. The main concern remains focused on government ownership of the American banking system. Will this end the market's paralysis or is it just another bad idea from a failed administration?
For months now, the American financial backbone has been a sinking ship, headed toward a crisis beyond anyone's experience and description because not even the Great Depression can compare. Many say we have been in a recession but there have been signs of a Depression for a while. Even such financial leaders like Bear Stearns, IndyMac bank start to fail and powerhouses like Fannie Mae and Freddie Mac need federal assistance; there is something rotten here. This is not to mention the Lehman Brother's bankruptcy and the proposed bailout of $700 billion bailout, which was initiated by American Insurance Group or AIG. No wonder our heads are spinning; we don't know if we are coming or going. Everyday on the news it is something new. People are taking to Internet financial pages like MSN Money and sending emails to financial experts across the country for advice. 
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.
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.
Many people do not understand the liquidity of real estate transactions and are often lead to believe that the transaction hinges on the accessibility of cash money. In this day and age of a troubled economy, few have such means. The reality is there are other benefits to explore when embarking upon a real estate transaction that has less to do with cash funds and more to do with the existing loan situation. Many homeowners do not see their existing loan as equity building over the years or that their home could work favorably on their behalf. So many people think with lack of cash, real estate transactions don't get done but there is flexibility in creative thinking.
