October 1, 2008

"I'm just a bill.  Yes, I'm only a bill.  And I'm sittin' here on Capitol Hill" SchoolHouse Rock, circa 1975.

And wow, what a bill we have with the Troubled Asset Relief Program.  When Henry Paulson and Ben Bernanke brought the act to congress last week, it was three pages.  The version that was voted down in the House of Representatives was somewhere around 120 pages.  The version the Senate just passed this evening is now some 451 pages long.

Granted, 3 pages may have been too much of a blank check.  The addition of some revisions, safeguards, and structure was probably a very good thing.  But, in the same breath, our Congress has done what our Congress does.  They've attached so much crap to this legislation (and wasted valuable time in so doing) that the punch may be taken out of its full impact.  What's worse, it could set the stage for political one-upsmanship where people keep slapping pet projects in there to "buy" their vote.

As an example, on page 300, Section 503, "Exemption from Excise Tax for certain wooden arrows designed for use by children."  What?  Are you freaking kidding?!

Then, on page 301, Section 504, "Income averaging for amounts received in connection with the Exxon Valdez litigation."  Huh?

And one of my favorites, on page 308, Section 506, "Modification of penalty on understatement of taxpayer's liability by tax return preparer."  Yeah, 'cause THAT's why companies were allowed to leverage assets to 30x their value, which helped crush our credit markets once home values began dipping....

At least the Senate did pass this 451 page monstrosity.  Hopefully the House will follow suit, without too much other dilutive crap.  There are some very good components of the bill.  But, remember those three items (and many others) that were added above, the next time you go to vote for your favorite public official.

More importantly, while our elected officials wasted time and added pointless legislation, the wheels of our economy could be coming off.  I'm hearing about car dealers who can't draw on their lines of credit to buy more inventory or make payroll.  This evening I heard that the State of California could be facing liquidity challenges, and potentially prohibitively high borrowing costs (or complete lack of anyone to lend) to fund regular projects and critical expenses such as payroll.

How much of that is real, or media hype, I really don't know yet.  But, I'd definitely err to the side of caution if I had a vote on this bill.

We're surely in uncharted economic territory, so nobody knows for sure what actions will help or hurt our recovery, in the near and long term.  But when you hear two really well respected, non-partisan (certainly in Ben Bernanke, and I'd bet in this case Henry Paulson too) heads of our economic centers, who've made careers of studying and working within our financial system, laying out the potential impact of inaction, you've got to take that seriously.  There are cynics who think this is another Weapons of Mass Destruction deal, but...I don't.  It's entirely different.

Do I think inaction will bring the world to a grinding halt?  No.  Do I think passage of this legislation (as is, or in a further modified form) will right our economy in short order?  No.

You know, what I think.  Basically, for a lot of people it's likely to get worse, before it gets better.  For others, there will be huge opportunities along the way.

Again, if credit (lending and borrowing) is the life blood of our economy and prosperity, then....lenders/creditors will be lining up to lend to strong borrowers.  Just look at Warren Buffet.  He just doled out $8 billion, $5billion to Goldman Sachs, and $3billion to GE.  I'd call both of those companies pretty strong borrowers.  And, he's apparently got another $32billion waiting to place.  I can't believe he's alone.

Yes, they're paying a premium for that cash infusion from Warren.  He saw opportunity and moved quickly.  Warren's doing quite well - by some accounts already being up $1billion from his Goldman position alone - but...those companies, GE and Goldman Sachs will use this money to grow in turn. 

That's the same thing if you're buying or refinancing your home or other real estate.  At least it should be.  Yes, lenders are going to want to know exactly who they're lending to.  And, they may even charge you more than they otherwise would, but...if you're a strong borrower, money will still be available.  But, if you're buying a home you're not buying "an investment" you're buying a place to house your family.  And, with a long-term horizon (10yrs or so), chances are in your favor that your home will appreciate.

If you're buying an investment property, and you can get positive cash flow or at least break even, again, you're well positioned to profit over the long haul.

And, we have to remember that even at 6.25% for 30yr fixed money, that's very cheap.  In fact in the last two weeks I'd locked many of my clients' loans in at 5.5% or so for 30yr fixed money.  That's the 2nd time this year rates have dipped that low.  Will we get there again, who knows?  As of today, rates are back up around 6%.  Again, not too big a swing, but...why not grab the opportunity of those dips if you can?  If you can't, 6% isn't bad!

In my opinion, at least from the perspective of financing real estate, it's mostly the folks on the fringe who will be hurt.  If you can't fully document your income and assets, it's going to be more difficult and expensive to borrow.  We've essentially flashed back 10 years coming back to where guidelines were then.  But...interest rates were much higher 10 years ago.  Will money ever flow as easily as it did during the last 6 years or so?  I doubt it.  Will mortgage rates rise back to where 7% is the norm for 30yr fixed money?  Maybe, but...I'm optimistic that for strong borrowers, rates will stay low.

Granted, institutional memory is often very short, but...I do think this economic implosion is a pivotal point that can lead to some very positive changes that don't hinder credit and growth, yet thoroughly monitor and verify enough financial information to know who's holding what obligations and how much they're leveraged.  And, that goes from the personal level to the corporate and mega-bank-brokerage level.

In the mean time, it's likely to be a bumpy ride, so...fasten your seatbelts, and try to enjoy the view.  If you're positioned right, you might see some great opportunities.  If you have time, call or write your Congressional Representative and urge them to support this bill.

Friday's jobs report will be interesting.  We learned Monday of this week that although inflationary pressures didn't continue their rise, they're still uncomfortably high.  However, the current state of affairs, should be deflationary, but...we'll see.

As always, call or email if you or anyone you know has questions about financing residential or commercial real estate.  Here are your rates for the week (or at least as of today).  Cheers!  E

Eric Grathwol

Loan Officer

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

www.priority1stmortgage.com

egrathwol@priority1stmortgage.com