Monday, August 13, 2007

The Stock Market Roller Coaster

What's really going on in the market? Why all of the hoopla about records highs and lows?

Let me take the time to break things down in layman’s terms, so we can understand it, and plan accordingly.

There are only a few times in history when the Real Estate and Stock Markets have fallen simultaneously, the recent reason behind this is the defaulting of our good ol friend, "The Subprime Mortgage". For the record, subprime mortgages are home loans given to high risk borrowers. High risk refers to those with shady credit histories, bankruptcies, non payments, 3 baby muvas’, making no car payments etc. There are certain "no-doc" subprime loans that don't even require lenders to verify the borrower's income. In extreme cases lenders offered what they called a "ninja" loan. No job, no income no assets.

Lenders were just giving money away trying to get as many mortgages on the books as they could. Well, this home loan frenzy increased home ownership rates to a high of 69.2% in 2004. These homes were paid for by mortgages with 3 year ARM's (adjustable rate mortgages) that have recently expired. This means that the terms are now able to be adjusted. Now three years goes by in a flash. People not watching the calendar and not prepared have seen their interest rates shoot up and their mortgage payments go up hundreds of dollars a month.

What some of us don't know is that when a bank gives you a loan, they set everything up and then sell it to investors (Smith Barney, Goldman Sachs, etc) packaged into bonds. They will approve a bunch of loans with borrowers with similar qualifications, package them together and an investment company will buy the debt. Due to the plummeting housing prices, institutional investors are seeing these bonds as high risks and refusing to buy them. Even AAA rated subprime bonds aren't selling.

Now lenders can only give out the amount of loans that they can afford to fund themselves (they still have to make loans, because they want to stay in business). This limits the amount of loans available, which in turn allows the lending company to raise the criteria to only highly qualified borrowers. If they increase the qualifications high enough, then maybe institutional investors will get back into the game. If offer them a bunch of mortgages by borrowers with credit scores only in the 700’s they might jump all over it.

When the home prices were rising, life was good. When you couldn't make a mortgage payment, you just refinanced. Took the equity out and kept it moving. After prices peaked in most markets in 2006 that ended quickly. Not only are people defaulting on their 1st mortgage but now they have two defaults.

How does this affect the economy?

Well business too want to borrow money to expand, and now there is no funds for them to borrow. It’s harder and the cash is not flowing as freely. That is why the Fed injected 24 billion dollars into the market.

This came in the form of repurchase agreements

nducted with mortgage bonds. This will allow money to keep flowing into the system.

What does that mean for you?

1. Keep your job. Do what you have to do to keep you income flowing.

2. The rental market will be alive and well again. Before it was hard to rent because any Tom, Dick and Tyrone could get a housing loan. Now with the restraints Bradley, Blake, and Matthew will also have trouble. They will be ready to rent and you will be there holding the rental agreement.

Remember in down markets the rich get richer. ….and we want in!



1 comment:

Anonymous said...

I was just searching blogs and found yours. This is truly an enlightening piece. I hear so much about subprime this and subprime that, but no one wants to take the time to explain it to the working class people.

You should teach a class.

Ann Marie