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A Guide to Recessionary Success

Mortgage and Lending with Freedom Lending

As the economy continues to struggle, I want to take a few moments to give you perspective from my professional standpoint.


We are currently amidst one of the largest banking crises since the Great Depression of the 1929 era.  As a result of that time period, the government sponsored two banking entities that would be used for times of crises, and they are known as Fannie Mae and Freddie Mac.  However, to confirm our troubled times, even Fannie Mae and Freddie Mac are on the brink of collapse.  They are currently in need a government bailout.  To assert even more truth of our times, IndyMac Bank, the #2 mortgage lender behind Countrywide, recently collapsed.  Many (over 10,000) lost hundreds of thousands of dollars due to the $100,000 FDIC limit to be insured.  Washington Mutual, the largest savings and deposit institution is also in trouble, with its stock value down significantly compared to previous value.  Wachovia's wholesale mortgage is coming to an end as well and it has all but abolished its exotic loan products, which were at one point its own unique product.  Bank of America's revenue was announced to have dropped 42% from this time last year.  If you see a pattern forming, you are right.  Banking is in trouble.  That means our money system may be in trouble.


American Express, one of the largest and most successful credit card companies in the world, has recently reported losses of 40% compared to this time last year.  American Express noted a rise in delinquencies with card holders.  Google's profits also fell short of analysts' expectations.  In short, we are going through a massive economic slowdown and a potential recessionary period.


What can you expect in the future?  Who knows, really.


But there some certainties we can all agree upon.


First of all, oil prices will not come down anytime soon.  This is a multi-faceted issue dealing with supply and demand, our currency valuation and degradation, political affairs affecting oil, our current administration's outlook and solution to the problem, as well as corporate interest in maintaining oil as our primary source of energy mostly for profit.  Aside from everything else, the cost of oil is grossly affected by the low value of the dollar; in a perfect world, where our dollar had a good value comparable to other currencies, oil would be about $60 to $70 per barrel. This drop in price will not happen anytime soon.


Secondly we can agree that consumer debt will remain the same, or possibly increase, since income has not increased in proportion to the cost of living.  Subsequently, more and more Americans will continue to sustain their lifestyles with debt.  It is quite noticeable that more and more commercials for credit help and credit consolidation are trumping on our television screens?  Between American Idol and Boston Legal, it is almost predictable to expect one or two credit repair or credit consolidation commercials.  Well, those commercials cost money.  So these companies have recently seen an astronomical increase in business.


Thirdly, we can be certain that Americans' savings are not going up in proportion to goals for retirement.  Savings has a parallel relationship with income.  The fact that income has not gone up in proportion with the cost of living means more and more Americans are not adequately saving for long-term goals, such as retirement.  Due to this, either one of two things will occur: Americans will work longer into their supposed-retirement era OR Americans will retire with much discomfort than originally planned.


This is a very volatile time.  With unemployment rates up, inflation up, and everything else mentioned above, I have a few suggestions.  My advice is to pay off consumer debt (as much as possible), limit luxury expenses, seek increases in income by proactively being more of an asset in your work environment, and ultimately save more than you ever have.  Saving is vital.  There will be opportunities to buy assets and equity positions in the coming months/years, and you must be liquid to do so since credit is very tight.  For example, real estate prices will be at a very low level.  You will want to purchase solid real estate investments and will thank yourself ten years from now.  This will include residential as well as commercial property.  The same will follow for strong company shares in the stock market.  You may want to buy index values in the S&P 500 and such, due to their overall low price levels compared to company valuation.  However, only being liquid will allow you to do so.  And if you do invest in the coming months/years, you will be very happy with the end result.


From a mortgage standpoint, you may want to get into an Interest Only ARM fixed for a good five to ten years.  Paying off a mortgage may not be a priority in a time where savings are so low for most Americans.  So pay interest only and save the rest or invest it in interest-earning accounts, to ward off inflation and increase liquidity.  We may be entering a recession and controlling these two variables is important.


Also, as you know, money sitting around actually loses value over time due to inflation.  More money printed by the Fed and distributed/injected into our economy makes the dollars you and I have in our wallets worth a bit less than they were before that injection.  So in order to simply counteract inflation, you need to have your money appreciating at a level of about 4-7% annually simply to come out even.

Additionally, from a mortgage standpoint, you may want to refinance now rather than later.  With the turmoil escalating more each day, qualifying for a mortgage will be tougher next week than it is today, tougher next year than it is this year, etc.  Banks do not even have the liquidity to lend in some cases; this holds true in IndyMac's case, where the Fed actually shut them down.  We see remnants of that reality with the Government Sponsored Entities Fannie Mae and Freddie Mac as well; if you were to liquidate their assets versus their debts, they would be negative.  So in short, Fannie and Freddie are in trouble-as are most lenders.  If these big lenders are in trouble, where will you be able to get a loan from?  That is the rationale you should use in evaluating your current finances and assessing the single largest debt/asset in your life (your home).  Remember that Fannie and Freddie are entities formed for times of crises.  If they are troubled during crises, then what happens?


Simply put: save, save, and save.  Invest when the opportunity arises.  And don't sweat it too much; downturns in the economy are necessary.


This is simply my opinion and is made for your reading experience.  






Copyright 2008 Cyrus Khadivi. All rights reserved.


Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production

The american express doesn't suprise me.  I think that VISA will experience even greater losses.

Jul 22, 2008 07:06 AM

I am not sure about that.  Visa is primarily a processing unit that does not hold the actual debt.  They simply process the transaction in which a lender actually holds the debt. American Express actually holds the debt, and is suffering defaulting card holders.

So there is a distinct difference in the two companies and their services.  I think Visa and Mastercard will hold their value steady since they both simply process.  American Express, however, does not surprise me with its decreasing revenues.

We shall see!


Jul 22, 2008 07:14 AM