President Bush's "Rate Freeze"
The "Countrywide Bailout"
The "Rebate Check" and a "Possible Recession"
The Value of a US Dollar
Social "In-Security?"
Every once in a while, I need to write an article that isn't entirely mortgage industry specific, but rather broad. Why? Many other elements affect the housing and mortgage industries and the housing/mortgage industries affect many other elements of our economy and society.
I find myself wondering often now, "Does the average person realize the trouble that our country is in?!"
Maybe it's because I look into my 13 month old daughters eyes and question how our actions now will directly affect her life.
I'm not a "Doom and Gloom" person by any means. In fact, being a business owner, I'm actually very optimistic and a part of the entrepreneurial spirit to which our country was founded and thrives on. However, our country is on the brink of major problems. Unfortunately, few care how the economy works (and fewer comprehend how it works) on a micro and macro level, and what can be done to help fix it. Meanwhile, we have a Government that continues to make decisions for us, putting "band aids" on top of the wounds of our country. Surgery isn't performed the way it should, to go in and correct the problem directly, rather a "quick fix" band aid is placed on top of problems, which often fall off when it starts to rain again. I ask this...
Would you rather lose a limb or die a slow bleeding death?
What our country needs to do is allow the free market to run its course and correct itself, WITHOUT GOVERNMENT INTERVENTION. Otherwise, we have a "falsified capitalistic market" that isn't transparent and will only continue to eliminate the middle class and create a major gap between the wealthy and the poor. I'm sure the large majority of readers of this article will be in the middle classes.
President Bush's "Rate Freeze" Proposal
I wrote an article recently, labeled "Bush's Bogus Rate Freeze." Our President's course of action to address the "sub-prime meltdown" was to sit down with the banks that made risky mortgage loans and ask them to put a "rate freeze" on sub-prime mortgages that were set to "readjust" to much higher payments. Payments that would probably mean an estimated payment increase of 1.5 times their current payment. Meanwhile, the borrower gets to live in a home with a current payment that is probably more then what they could afford by standard Underwriting guidelines to begin with! Yes, some of these poor souls were victims to mortgage fraud. Most of them were fully aware of their poor decisions and are now being rewarded for it. Regardless, they were approved, more often than not, on "Stated Income/Stated Asset" loans, where their ability to repay the loan was never confirmed. I have 3 problems with Bush's rate freeze as a "band aid."
Problem 1
You are essentially dragging out the inevitable foreclosures 3+ more years, to avoid a larger number of them on the market all at once now. If a person can't afford the "recalculated" payment now, it is likely that they won't be able to afford the recalculated payment in the near future. Let the market correct itself with a "hands off approach" and homes values will rebound much faster, even if there are more foreclosures on the market upfront.
Problem 2
The proposed "rate freeze" would only affect sub prime borrowers. How fair is it to help one group of borrowers (that had bad credit to begin with) and turn a blind eye to good borrowers with excellent credit that can't afford the reset payment on their adjustable rate mortgages facing foreclosure as well? It's simply not fair.
Problem 3
You are allowing the Government to interfere with the free, capitalistic market of risk and reward. The banks, investors and borrowers all took a bad risk that didn't pan out. Freezing interest rates on third parties investments will only create less desire by Wall Street to invest in Mortgage Backed Securities once again, continuing the "Credit Crisis" we are now in. Freezing rates belittles their investment and expected rates of return, which will turn them towards other investments with less risk of Government intervention (or persuasion) and the same returns.
The "Countrywide Bailout"
Countrywide Home Loans was the Number 1 lender in the United States. Number 1! And they were facing major problems, which very few saw coming. I saw many of the signs before others, and it had the potential to affect millions. I wonder how many shareholders of Countrywide stock would have saved thousands of dollars, had they read my article, "The Countrywide Controversy?" You think Enron was bad? Now you're talking about millions of home loans across that United States that could possibly be orphans!
But Uncle Sam couldn't allow that. Why? It would be devastating to our economy. As such, everyone looked around at who could take on such a task. Yes. Bank of America to the rescue. But why would a financially sound company take on Countrywide for a combined $6 Billion that has class action lawsuits against it in several states and a poorly performing sub-prime loan portfolio, with an increasing amount of foreclosures? Some say it's because Bank of America sees the takeover of Countrywide as an opportunity to learn all of the "state of the art, behind the scenes operations of the number 1 lender in the United States, which did it better then anyone else" Ummm...If you did it better then anyone else, you wouldn't be selling your interests in the company to Bank of America to begin with!
Behind closed doors incentives from Uncle Sam maybe? Being able to write off substantial losses from their books with some additional love from the American Taxpayer? The banking industry and lending industry are regulated by two different entities. Maybe Bank of America saw an opportunity to enter into a different business, which doesn't require them to have a 10% regulated safety net on deposits? Had Countrywide gone bankrupt, the financial markets would have been in distraught. Yes, even more so than they are already. I think the overtaking of Countrywide by Bank of America still has a lot of revealing to do, especially as B of A looks deeper into Countrywide's portfolio and business practices. In the meantime, it will act as a great band aid for the economy and only time will tell.
The "Rebate Check" and a "Possible Recession"
On January 18th, President Bush called for a short-term $140 billion economic stimulus package to help give the sagging U.S. economy a "shot in the arm", which now stands before Congress to keep the United States out of a recession. In 2001, every tax payer received a "rebate check" of $300 for an individual and $600 for a married couple.
An October 2002 paper by the National Bureau of Economic Research said that roughly 20 percent of Americans spent the checks. Nearly a third of the people who got checks saved or invested the refund, and the rest used it to pay off bills or debt. In 2008, President Bush is proposing up to an $800 "rebate check" for individuals and $1600 for married couples, which could be seen as early as Spring 2008. The idea is to get people to spend money and stimulate the economy. The catch is, the "rebate check" is really a loan, not a rebate! Do you really think every American taxpayer "overspent" on paying their taxes somewhere and a Government that is in a major deficit "owes us a rebate?" No, not really! Accepting a rebate check in 2008 will be an advance on the refund you'll get when you file April 2009. What happens if you actually owe money on your 2009 taxes? Hmmm! The old saying, "there's no such thing as a free lunch" will still hold true!
See what happened to your 2001 "rebate" here: http://www.truthorfiction.com/rumors/t/taxadvance.htm
All of the talk now is about avoiding a recession. I pose the thought that we have been in a recession for some time now and it was just masked really well by the housing market. As home prices escalated over the past few years, homeowners had a false perception of their net wealth, thinking, "Wow, my home is worth $200,000+ more dollars then I bought it for a few years ago?!" This created a very large group of consumers across the United States that were "living the American Dream" and treated their homes like ATM machines, buying cars, boats, vacations and many other things. But, would those individuals have spent that money and purchased those items if their home was still worth what they purchased it for? Probably not! And now, their homes are trickling back down in value and they may even owe more on the home then what it is worth!
The Value of a Dollar
The continuous deflation of the U.S. Dollar is a major problem that worries me. Have you read a dollar bill recently? It says, "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE." LEGAL U.S. TENDER that at one point was backed by gold at Fort Knox and the U.S. Treasury. Every dollar in global circulation had gold behind it. As the United States Government continues to print off U.S. currency that doesn't have gold to back it up, what happens to the value of our currency? Yes, it gets devalued. And such is the case with our dollar today. You get less "bang for your buck", far less! My grandfather was a butcher that raised an entire family of 7 in a 2,500 square foot home on a butcher's wage. Now, I see married couples with dual incomes, earning over $125,000 combined that can barely pay the bills at the end of the month, living in a condo with 2 children! What type of lifestyle are we leading ourselves into in America? Foreign interests are now looking at the United States as a bargain, because their currencies are so much stronger then ours. No wait...they're looking at our country as a steal! What will happen to the United States job economy of the future, as foreign interests grow stronger and hold a larger stake in the United States economy? A large portion of the existing U.S. workforce is the retiring Baby Boom generation, which counts for 25% of the existing workforce, according to the U.S. Bureau of Labor Statistics! How will that look on our GDP numbers?
I think Americans need to go "back to the basics." I see far too many people that live above and beyond their means in mine and my parents' generation. The power of the marketing dollar has led our society into thinking what we ought to be, instead of what really counts and what we should be.
Relying on "Social In-Security?"
As of now, my dad is 56 and expected to receive 75% of his estimated Social Security disbursements. Will fiscal policy change that to 50% by the time he is eligible?
What will you get? I'm 28 and expecting none of it!
Wake up America! 2008 is an election year.
Will your voice be heard in these important times?
Scott Gormley
Broker/Owner
Oak Valley Mortgage
Direct: 530-592-8362
Fax: 530-267-5555
Email: Scott@OakValleyMortgage.com
Website: http://www.caloan.com/
"You Find the Perfect Home, We'll Find the Perfect Loan!"
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Posted by 
Good morning Scott. Reading your post was like trying to eat a steak dinner for breakfast! I really appreciate the insights you shared on the state of our economy. Being a mortgage company owner and father of a 10-month old myself, I share many of the same concerns as you. We are such a reactive nation, from our finances to our healthcare system. We usually end up dealing with the problems far after they've come along and that is quite evident in the mortgage mess we have right now.
Where do we go from here? Band-aids aside, with rates in the low 5%'s, I'm hoping for some people to get back in the real estate game and start buying up some of the inventory. It will take time to eat through the future foreclosures, builder supply, and the rest of the homes/condos on the market, but the pendulum will eventually swing back and we'll be ready when it does. Thanks again for the thought-provoking words.