These last few weeks have been scary times in the financial markets. It felt like an earthquake a little over a week ago when the government stepped in and took over mortgage giants Fannie Mae and Freddie Mac. The ground shifted on Wall Street again this weekend as the feds declined to save Lehman Brothers, letting one of the biggest players on Wall Street go bankrupt as a result of its exposure to bad mortgage loans. Bank of America also bought out Merrill Lynch this weekend for pennies on the dollar, avoiding another big name bankruptcy. The earth moved again Tuesday night when the US government stepped in to save AIG, a huge international insurance company that was overloaded with credit swaps linked to mortgage debt. The AIG deal is structured as a 2 year loan of 85 billion dollars in exchange for 80% of the company's equity. AIG has a tremendous amount of assets, but if it was forced to liquidate quickly at fire sale prices, it would wreak havoc on the financial markets. So unlike Lehman Brothers it was considered too big too fail, and chances are good that the Fed will get our money back. The earth is still shaking, and with companies like Washington Mutual and Morgan Stanley still on the brink, we know there are still many aftershocks to come. Is it time to panic yet?
This mortgage crisis is showing how interlinked our financial system is. This isn't just happening here, repercussions are being felt across the globe. The stock market has had an awful week, and even the safest investments like money market funds are affected. This is a crisis of confidence in our entire financial system. The use of derivatives, complicated financial instruments like collateralized debt obligations and credit default swaps which slice and dice a pool of mortgages or other financial assets into a variety of new investments, is at the heart of this crisis. The goal of these products was to increase return and cut the risk for the investor. But the truth was that the derivatives were so complicated that most investors had no idea what they were really buying, and what the true risk of the underlying assets were. These derivatives were sold based on the confidence that someone knew what they were doing, and that the risk and returns were as advertised. That has turned out not to be the case, and investor confidence is shaken. There is no doubt that these are scary times.
But this isn't the end of the world if you are able to look at this with a long range perspective. The government was late figuring out that this was a problem, but they are now very actively managing the crisis. This morning the Fed stepped in with a consortium of foreign central banks and pumped another 247 billion into the financial system in an effort to increase liquidity and boost confidence. The impression is that what ever needs to be done will be done.
So the question is, how does this affect you as a home buyer or home owner, and what can you do now?
Don't panic - If I could go back in time, I'm sure I would have done some things differently. But what is done is already done and it is too late to change. There will be more bankruptcies and more shocks to the system in the weeks and months to come. But I'm guessing that we are a lot closer to the bottom now than we were before.
Focus on the long term - I try not to look at my stock accounts or 401k balance too often, especially lately, because I know I'm not going to like what I see. At the same time I'm not planning on spending the money anytime soon, so the loss now is just on paper. It is the same with my house. I know it was worth a lot more a few years ago than it is now, but I don't plan on moving any time soon, so the paper loss I have now is no more important than the paper gain I could have sold it for a few years back.
Take advantage of opportunities - In every crisis there is an opportunity. The old saying is that the time to buy is when there is blood in the streets. The housing market has seen its share of blood lately, and if you are willing to go against the crowd, this is a time where you can find some real bargains. House prices are much lower than they were over the last several years, and sellers are starting to accept the reality of the market. Interest rates are also near their low for the year, so you can buy more of a house at a lower interest rate than you could before.
The same thinking applies if you already own your home and have no intention of moving. The bad news in the economy could be an opportunity for you to improve your own financial position. The low interest rates we are seeing could allow you to refinance your higher rate mortgage for a lower interest rate mortgage. Or get out of your adjustable rate loan and into a more stable fixed rate. You should also look at your over all debt structure. If you have a lot of credit cards and consumer debt, the equity in your home could be restructured to pay off your debts and roll it into your mortgage, which could save you hundreds of dollars per month, giving you some extra breathing room. Rates are low now, take advantage of the low rates while you can.
Put yourself in the best situation for later - With the problems in the financial industry, it is harder to qualify for a mortgage than it used to be. Maybe you aren't able to take advantage of the opportunities now, but you can work on improving your position so you can be in a better position soon. That could mean fixing some problems with your credit, or saving for a down payment. Working on your problems now will help you get where you want to go later.
There is no question that these are scary times, but my guess is that we will get through this and our financial system will be stronger in the end. If you take advantage of the opportunities as they present themselves, you could be in a stronger position, too.
Pete Thompson is an Illinois mortgage banker who provides superior mortgage service and competitive mortgage rates in Chicago, the Chicago area and throughout Illinois. Click here for a Free copy of The Real World Home Buyer's Guide - How to Save Thousands when Buying a Home and Getting a mortgage. For information on the latest mortgage news and a breakdown of current Illinois mortgage rates, please visit Illinois Mortgage Rates and News.
Comments (15)Subscribe to CommentsComment