Monday, October 26, 2009

Good News/Bad News - Is There a Difference?

Foreclosures are up 23% from the end of the 3rd quarter last year. Foreclosures are up 5% from the end of the second quarter this year. If the numbers continue, this year will have more foreclosures than any before. THAT'S THE GOOD NEWS!

With all of the money given (loaned) to banks, and with the likes of JPMorgan Chase having a profit for the last quarter of $3,600,000,000 ($3.6 Billion), having doubled the amount of money it has planned on for loan losses, you might think that there would be money for you to borrow to refinance your house (after all your credit is good ), or borrow for your business. WRONG - THINK AGAIN! Banks are bracing for the next wave of losses; commercial real estate mortgage backed securities failing because the loans that make up the securities are defaulting. Additionally, because of the financial crisis we are still in, the "normal" way of making loans will not work.

In the April 13th posting (and several others), the whole issue of securitization was explained. The basics: agree to buy a large number of mortgages so that the value, on paper, of what the security maker controls is huge, like $1 Billion. Rather than holding the loans in any Bank, and risking borrowers not paying the mortgage regularly, sell the loans in a package (pool) to investors on Wall Street; investors like mutual funds, individuals, pensions, and of course the Federal Government. So now the $1 Billion portfolio is owned by thousands of people, plans etc. The security eliminates the risk of loss for all of the banks involved in making the loans, because no bank owns one of the actual mortgages - not one. Investors, not lenders/banks, each own a small portion of the pool. Again, they own a security, that acts like a corporate bond, but not a mortgage.

Because of the recent losses and the enormous rise in foreclosures, no one wants to buy these mortgage-backed securities ("MBS"). If no one will buy them, then they will not be created, because the creator does not want to get stuck with a long-term investment (pooled mortgages). If they are not being created, the banks will not lend; even to good borrowers. THIS IS THE BAD NEWS.

There will be no real recovery until credit is available again. The government's mortgage lenders FannieMae and FreddieMac, FHA, have new and very strict guidelines. If you have a blemish on your credit report, NO LOAN.

Businesses use borrowed money all of the time to keep operations running, to buy new equipment, and to expand. If banks won't lend to them, the business shrinks and dies. More jobs are lost, and not just at that business. if people lose work, then they cannot spend money and other businesses fail. That is the cycle we are in for unemployment. And more unemployment means more defaults on mortgage payments, and that means more foreclosures.

The new Bank regulations that will require banks to keep more money set aside for bad loans, and the fact that only the Federal Government will buy the existing MBS and not new ones, means that Banks will not make loans, except to the very best customers. The noose gets tighter and tighter. The recent run-up of the stock market is not a reflection of consumers’ and "Main Street" types’ (us) confidence. The profits are being made by traders, Wall Street professionals, and companies like JPMorgan Chase.

So, the very kinds of investments, the MBS or pools of mortgages, that allowed the housing boon, has led us to the housing boom - it’s imploded. Breaking the cycle we are in will take time; actually a great deal of it

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