Black Monday: The end of the financial world as we know it….
If you watch any of the financial TV shows one would think that we are on the verge of an epic economic implosion… Well, the world didn’t end, though you wouldn’t have known it by watching TV or reading the paper. Pessimistic, drama laced hyperbole sells newspapers and drives up viewership ratings. It also confuses people to what the hell is really going on.
Being that AgentGenius is a real estate professional centric community, the natural question is ‘What does this mean to the real estate and mortgage markets?‘
The Bazillion Dollar Question
Long term, that’s a tough question that can’t easily be answered. If I could, I would be a Bazillionaire, own many private islands and wouldn’t be writing this article.
Short-term, it probably means lower interest rates as investors shift their assets out of some huge equity brokerages and into cash and/or more stable bonds. What are ‘more stable bonds’? Ironically: Mortgage Backed Securities, especially since the Treasury backed Fannie Mae and Freddie Mac.
However, lower rates do not mean faster, looser underwriting standards and it will probably take longer to close a loan due to the uptick in mortgage applications. With all the staff cuts in the industry, an uptick in business will bog down most mortgage lending operations. Patience is a virtue that is wisely practiced in today’s market.
Back In The Day
Mortgage qualification has moved to ‘back in the day’, where borrowers must have (at the very least) 5% down (under the best of circumstances), provable income and assets in line with the loan amount being requested, and a credit score above 700.
During the refi boom, if a borrower had 2 out of the 3 major components of mortgage qualification: credit, cash (down payment or true equity) or income, they got approved somewhere. Today, a borrower must be strong in all three. If they are not, there will be issues. Back in the day, lenders did whatever they could to make a loan work. Today, they are looking for reasons to turn them down. It is The State of the Union.
Anyway, back to ‘Black Monday’…the Lehman Brothers Bankruptcy filing, Merrill Lynch and BoFA’s engagement and AIG walking on marbles. I’m going to try and be as succinct and clear as possible, leaving out the minutia that can cause ones head to explode in confusion.
The Government can’t bail everyone out and it looks like Lehman Bros got to be the first major brokerage to receive the pink slip. Why? They had the baddest of the bad assets, especially from a mortgage perspective, Lehman owned Aurora Loan Services and BNC Mortgage. These two sub-divisions lent sub-prime mortgage money on some of the most ridiculous terms I’ve ever seen. 100% LTV on investment properties with a 640 score, no need to prove income or assets… A+ paper, for the bathroom.
In the end it was cheaper and easier to let Lehman Bros get gobbled up in Bankruptcy by Goldman Sachs and other private equity players than have the Treasury shore them up. Someone had to be the first to get the shiv.
Merrill Lynch and BoFA
As it became evident Lehman Bros was going down, Merrill Lynch scrambled to make a deal with what ended up being cash deposit rich Bank of America (rumors had them courting Wachovia too). Good for Merrill, bad for BoFA, who apparently didn’t learn their lesson when they acquired Countrywide (IMO). Merrill started going sideways when they aggressively entered and became one of the top issuers of *drum roll please* the sub-prime mortgage market. The way it’s being spun is BoFA is strong in banking and lending and wanted Merrill’s wealth management pundits…spin-spin…
The world’s largest insurer (for now) appears to be in a bit of trouble as well, although the trouble should be confined to their holding company and not affect their individual insurance company subsidiary’s ability to conduct business and pay claims. AIG (as most insurance companies do) invest a portion of their premiums into other assets, and guess where AIG invested heavily? *Drum roll please* the sub-prime mortgage market…
AIG is significant in all of this for a few reasons, they’re part of the DJIA and a staple of many mutual funds. So as AIG goes, it drags the Dow and many others (down) with it.
The Common Denominators
Someone’s got to pay the piper. The common denominators here are how vested these companies were/are in the sub-prime mortgage market, how bad those poor performing assets really are and what other upside is there to mitigate the crap…
Lehman Bros appears to have been the worst of the bad and was subsequently voted off the island.
Black Monday and the Housing Market
So, anyway…again: what does ‘Black Monday’ mean to the real estate and housing market? Probably very little. The corollary seems to be that these entities heavy investment in high-risk sub-prime mortgage loans led to their unwinding and/or demise.
Unless you live in California, Las Vegas, South Florida, or the Rust Belt…which either experienced high levels of mortgage fraud, illogical appreciation, or economic tough times due to indigenous ‘industrial age’ industry…your local housing market is no worse off than it was before Wall Street’s most recent ‘Black Monday’.
Mortgages are still widely available under ‘back in the day’ make sense underwriting guidelines and conforming (Fannie Freddie backed mortgage) rates are falling through the floor. With the government backstopping the two GSEs, foreclosures and the subsequent depreciation they cause should lighten up.
Even at the risk of sounding like NAR’s talking heads, it is a great time to buy real estate…they’re just not giving money away anymore…