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…
You might also like
|
|
|
|
|
Loading ...
excellent post as usual! This is why I read AgentGenius religiously!
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.
One thing, Jeff – what do you see the long-term shakeup being, if any, to the housing market?
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?
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?
@ 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…
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…”
Well researched and explained. I appreciate your effort!
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.
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
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.
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?
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?
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.
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.
Already seeing this. If you do short sales, find out who the investor is before you go very far down the road.
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
Facebook | Technorati | Twitter
$85 billion bridge loan approved for AIG per fox news 8:05p
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.
@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
Jeff,
Well put! I really appreciate your perspective!
I have to send this article to some of my depressed colleagues!
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.
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
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.
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.
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?
you are kidding aren’t you?