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Wall Street Hyperbole and the Real Estate Markets

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Black Monday

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.

Lehman Brothers

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…

AIG

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…

Jeff started TheXBroker.com in August of 2006 to express his industry knowledge and provocative opinion. He’s been an adversary of traditional real estate and mortgage business since running his own brokerages. Formally educated in the biological sciences at Syracuse University and Barton College, once Jeff discovered how little entry level research science paid, he started his post collegiate career working for Branch Banking and Trust in The Triad area of North Carolina. He learned about the worlds of finance and real estate and began to personally purchase property at the courthouse steps. Today, Jeff is VP Operations and Business Development of ActiveRain Corp and still The XBroker

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36 Comments

36 Comments

  1. Jason Farris

    September 16, 2008 at 3:31 pm

    excellent post as usual! This is why I read AgentGenius religiously!

  2. Jeremy Hart

    September 16, 2008 at 3:34 pm

    This is the best analysis of the situation I’ve seen yet. Have been working for the last hour on how to best explain all of this, and you knocked it out of the park. Thank you, Jeff, for putting so much helpful information into this.

  3. Jeremy Hart

    September 16, 2008 at 3:35 pm

    One thing, Jeff – what do you see the long-term shakeup being, if any, to the housing market?

  4. Tom Hall

    September 16, 2008 at 3:52 pm

    Is it fair to assume that banks will feel greater pressure to offer workouts and write down the value of homes versus foreclosure – is an performing asset better than a write-off? Curious to hear what people think.

    I think Paulson subscribed to the theory – actions speak louder than words – the Housing Bill gave banks the option to work out a loan – now with no further fed bailouts, I’m wondering if banks will feel the pressure to at least hang on to the assets they have?

  5. Dave Shafer

    September 16, 2008 at 3:52 pm

    Nicely written explanation. I wonder how AIG comes out now that they are allowing it to use capital from insurance areas to shore up their MBS losses. Also, remember much of this is due to the inability to correctly value these securities. They do have some value, just not sure how much?

  6. Jeff Corbett

    September 16, 2008 at 4:03 pm

    @ Jeremy: “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.” 😉

    @Tom: When the Government backstopped Fannie and Freddie, they converted Lender paper into Treasury paper, which gives the gov’t the ability to work out any loan anyway they see fit. It seems safe to say that you will see a big increase in loan workouts…

    Performing asset is far better than a write off…

    Lenders will ponder and scrutinize ‘bird in hand vs two in the bush’…government will walk with bird in hand…most of the time…

  7. Jeff Corbett

    September 16, 2008 at 4:11 pm

    Looks like Barclays is first to the Lehman Bros yard sale…”We’ll take the equities and fixed income stuff…you can keep the mortgage crap…”

  8. Bob Schenkenberger

    September 16, 2008 at 4:13 pm

    Well researched and explained. I appreciate your effort!

  9. Tom Hall

    September 16, 2008 at 4:14 pm

    Jeff – thanks for your response – being cautious optimistic, I think the fact that most remaining properties facing foreclosure may be thwarted, we may be able to start seeing the existing foreclosed inventory selling and prices stabilizing in the worst hit areas. Seems we’re leveling out in Chicago – or at least the sense I am getting.

  10. Jennifer Klaussen

    September 16, 2008 at 4:49 pm

    So interesting that we’re all on the same page – I wrote a similar article today – not as well written, witty and informative as yours – but same message!! The sky is still in the sky and it’s an excellent time to buy!

    Rock on!
    Jennifer

  11. Kris Berg

    September 16, 2008 at 5:29 pm

    X-Man – Great information. I feel a link coming, although that was a big “unless you live in” caveat at the end for a California girl. In 48 hours, I have already had a sale cancel and a listing pull the plug before MLS because of the news.

  12. Jeff Corbett

    September 16, 2008 at 5:42 pm

    I’m livin right up the road from you Kris…Irvine, Californicrazy 🙂 The epicenter of the sub-prime debacle 🙁

    Did your clients who pulled the sale and listing work for or have their money managed by Lehman Bros by any chance? 😉

  13. Jess

    September 16, 2008 at 5:48 pm

    Nice article. It always amazes me how the media can cause the rest of the world to go into a frenzy. Are we all just sheep following the wolf?

  14. Steve

    September 16, 2008 at 6:12 pm

    Jeff,

    Thank you! This is such a great post. My mother has her home on the market in Denver and called us saying the world was ending & she needed to pull her house off the market immediately. I think I succeeded in calming her some, but this blog will put her fears to rest completely.

  15. Paul Francis, CRS

    September 16, 2008 at 6:17 pm

    Nice one Jeff.. definitely worthy of sharing with my SOI. My opinion but it’s less scary today then it was two years ago with the prices we had in Las Vegas.

  16. Bob

    September 16, 2008 at 6:24 pm

    When the Government backstopped Fannie and Freddie, they converted Lender paper into Treasury paper, which gives the gov’t the ability to work out any loan anyway they see fit. It seems safe to say that you will see a big increase in loan workouts…

    Already seeing this. If you do short sales, find out who the investor is before you go very far down the road.

  17. Bill Lublin

    September 16, 2008 at 6:46 pm

    The X Broker
    Men want to be him…
    Women want to be with him…
    And all because he can take a big pile of hot stinking mess and explain it with flair and insight!

    Jeff – this is possibly the finest analysis of the current stage of the mortgage debacle I hve read to date. Well done 🙂

  18. Benn Rosales

    September 16, 2008 at 7:06 pm

    $85 billion bridge loan approved for AIG per fox news 8:05p

  19. Josh

    September 16, 2008 at 7:41 pm

    Well written, well received.

    You think not much will change in the housing market except the areas you mentioned, SoCal being one of them. What, if anything, will you be doing differently on a day to day basis as a result of all the news you’ve just reported on in the article?

    Thanks for the great insight.

  20. Jeff Corbett

    September 16, 2008 at 8:07 pm

    @Bill Why thank you sir…I think that is the nicest compliment I’ve ever received 🙂 Maybe you could coach Lani on that a bit 😉

    @Josh I dont think So Cal (or the other areas) will rebound quite as fast, the cycle will be much slower.
    As far as what I will be doing differently? I’m not an agent in real estate and/or mortgage industry anymore, my main gig is consulting and an internet application for the mortgage industry.
    If I were a practicing agent, I would lean out the fat in my business, employ progressive strategies that considered this quickly changing landscape and otherwise be pro-active rather than reactive…and network with like people…like the ones in the sidebar 😉

  21. Dan Connolly

    September 16, 2008 at 11:21 pm

    Jeff,

    Well put! I really appreciate your perspective!

    Someone had to be the first to get the shiv.Lehman Bros appears to have been the worst of the bad and was subsequently voted off the island.

    I have to send this article to some of my depressed colleagues!

  22. Missy Caulk

    September 17, 2008 at 5:36 am

    Well, I live in the rust belt, we’ve been having black Monday’s, Tuesday’s, Wednesday’s for a long time. Actually since 2001 BEFORE 9-11.

    Mostly ours is due to job losses or restructuring as the “big 3” like to call it. Like you said we need other industries to move in here.

  23. Steve Simon

    September 17, 2008 at 6:05 am

    I was smiling as I read Jeff’s post, not because the of the content but because the writing has a lot of similarity to about ten posts on my site. The only difference was I broke down the subject matter into smaller more detailed posts. The conclusions from both spaces are very close to one another.
    its nice when you see your thoughts are shared by others 🙂

  24. Mack

    September 17, 2008 at 7:41 am

    I agree with your comments about lower rates and longer underwriting time frames. The financing will be there for the qualified buyers, it just may take a bit longer to get them closed. Thanks for your insight and explanation.

  25. UtahLuxury.com

    September 18, 2008 at 8:37 am

    Great article. I see much of this to be true as I have family in California that have seen a lot of problems happening. I live in Utah where we have seen the effects but not nearly as bad as the big markets.

  26. Caldwell Hancock

    December 27, 2008 at 1:49 am

    Where can one go to get a jumbo subprime refi mortgage taking out a $550K first on a personal residence valued at somewhere between 600 and 750, borrower credit score below 700?

  27. jim williams

    January 10, 2009 at 6:09 pm

    you are kidding aren’t you?

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Economic News

Is the real estate industry endorsing Carson’s nomination to HUD?

(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?

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NAR strongly backs Dr. Carson’s nomination

When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”

At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?

The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.

In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…

>>>>>Click to continue reading…<<<<<

#CarsonHUD

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Economic News

Job openings hit 14-year high, signaling economic improvement

The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.

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job openings

Job openings hit a high point

To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.

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The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.

Good news, bad news, depending on your profession

That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.

Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.

What’s next

If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.

If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.

Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.

#JobOpenings

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Economic News

Gas prices are down, so are gas taxes about to go up?

Do low gas prices mean higher gas taxes are on the way? Budgeting for 2015 just got a bit more complicated, if some politicians have their way.

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gas-tax

Gas taxes and your bottom line

Many industries rely heavily on time in their vehicle, not just truck drivers and delivery trucks. Sales professionals hop in their vehicles throughout the day, as do many other types of professionals (service providers like plumbers, and so forth). For that reason, gas prices and taxes are a relevant line item that must be budgeted for 2015, but with politicians making the rounds to push for higher gas taxes, budgeting becomes more complicated.

Gas prices are down roughly 50 cents per gallon compared to a year ago, which some analysts say have contributed to more money in consumers’ pockets. Some believe that this will improve holiday sales, but others believe the timing is just right to increase federal taxes on gas. The current tax on gas is 18.40 cents per gallon, and on diesel are 24.40 cents per gallon.

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Supporters and opponents are polar opposites

Supporters argue as follows: gas prices are low, so it won’t hurt to increase federal gas taxes, in fact, those funds must go toward improving our infrastructure, which in the long run, saves Americans money because smoother roads mean better gas mileage and less congestion.

Gas taxes have long been a polarizing concept, and despite lowered gas prices, the controversial nature of the taxes have not diminished.

While some are pushing for complete abolition of federal gas taxes, others, like former Pennsylvania Governor, Ed Rendell (D) tell CNBC, “Say that cost the average driver $130 a year. They would get a return on that investment” in safer roads and increased quality of life, he added.

The Washington Post‘s Chris Mooney points out that federal gas taxes have been “stuck” at 18 cents for over 20 years, last raised when gas was barely a dollar a gallon and that the tax must increase not only to improve the infrastructure, but to “green” our behavior, and help our nation find tax reform compromise.

Is a gas tax politically plausible?

Mooney writes, “So, this is not an argument that a gas tax raise is politically plausible — any more than a economically efficient tax on carbon would be. It’s merely a suggestion that — ignoring politics — it might be a pretty good idea.”

Rendell noted, “The World Economic Forum, 10 years ago, rated us the best infrastructure in the world,” adding that we “need to do something for our infrastructure, not in a one or two year period, but over a decade.”

Others would note that this rating has not crumbled in just a few years, that despite many bridges and roads in need of repair, our infrastructure is still superior to even the most civilized nations.

Regardless of the reasons, most believe that Congress won’t touch this issue with a ten-foot pole, especially leading up to another Presidential campaign season starting next year.

“I think it’s too toxic and continues to be too toxic,” Steve LaTourette (the former Republican congressman best known for his close friendship with his fellow Ohioan, Speaker John Boehner) tells The Atlantic. “I see no political will to get this done.”

Whether the time is fortuitous or not, and regardless of the positive side effects, many point to a fear of voters’ retaliation against any politician siding with a gas hike, so this matter going any further than the proposal stage is unlikely.

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