October 2008
Community Paper
copyright ©2008 by Community Paper College Park, Inc. All rights reserved.
LEHMAN, AIG, AND BEAR STEARNS... OH MY!
by Mike Derenthal, Derenthal Realty Group and College Park resident
I recently got into a friendly “discussion” with several buddies about who is to blame for the housing and credit crisis that is, according to some, shaking the very foundations of our financial system. So who is to blame?
If you like to bemoan the evils of “Corporate America”, then you’ve probably attributed it all to the greedy investment bankers on Wall Street. After all, if they weren’t so busy chasing profits all the time, maybe they wouldn’t have created all of those mortgage-backed security investment vehicles that allowed so many bad loans to infect the global financial system.
Or do you subscribe to Caveat Emptor, aka the belief of "buyer beware” and that if people were gullible enough to borrow to the hilt to finance overvalued real estate, that the current situation is theirs to bear, and theirs alone?
Let’s not leave out the Greenspan Bandwagon. Those are the folks who will tell you that Greenspan’s loose monetary policy of the late ninety’s and early naughty’s (my new favorite term for this decade) are what fueled the run up in values and what ultimately brought the real estate market crashing down around us.
I’ve even heard it suggested (though none of my friends will admit it to my face) that some believe the real estate industry (realtors and mortgage brokers) should get the credit, fanning the fire by telling all of their clients that real estate, at any price, is a fool proof investment.
Who are we leaving out? Oh yeah, the President, Congress, and while we’re at it – let’s throw in the Securities and Exchange Commission. Why didn’t they provide the laws and / or oversight to prevent this whole thing from happening?
All of these make for quick, convenient explanations, and make it easy to take a side in a discussion. Even if you DID understand the intricacies of the financials behind this mess, you probably don’t have many friends who care to sit around and listen to you explain it (or am I just assuming everyone has buddies like mine?)
Now I’m not an economist (and I don’t play one on tv… har de har har…), but I do love to read up on this stuff. And recently, a friend put me on to a podcast that offered an extremely encompassing, unbiased (for the most part) overview of what happened, and the economic forces at work to create this mess.
Can I adequately boil down a 50 minute podcast into a few concise bullet points that do the authors justice? Not at all. Will I try? You bet…
• Roughly 10 years ago the global economy found itself awash with more cash than it had ever seen in the history of the world.
• Investment bankers, seeing an opportunity, created investment vehicles called mortgaged backed securities (MBS’s). These pooled large numbers of mortgages (from regular borrowers like you and me) into similar bundles of risk, which were then sold on the world markets to the investors who were looking for safe places to invest their money.
• These MBS devices were very profitable, increasing their demand. More money flowed from global markets, into these MBS’s, which ultimately increased demand for the mortgages on which they were based.
• This demand for more mortgages created incentive for individual lenders to loosen their standards, making more money available for purchases and refi’s.
• The easy availability of funds pushed up the demand for housing which created a bubble. Many of the individuals who were obtaining these loans were not qualified. Most of the values used to establish collateral were not sustainable.
• The ability of the MBS’s to be traded in bits and pieces across global financial markets created an “infection” so to speak, of mis-valued investments that spread throughout the world.
• CRASH!!!!!!!!!!!!
We are now over a year into what has become known as the Credit Crisis. The extent and impact of this infection is still undetermined. Lots of very intelligent people, with very complicated spreadsheets, are trying to figure it out. In the mean time, large companies that found themselves exposed to this mess continue to fall. Our government continues to selectively take over the ones they feel show a real risk to our economic health, and let others die.
How does all this mumbo jumbo affect us here in College Park? Hard to say. The obvious impact will be that home loans are going to become even harder to obtain I think. During the 24 hours I’ve spent on this article, mortgage rates jumped almost a half point – lots of volatility right now. This will of course put further pressure on real estate prices.
Keep in mind – our market has been picking up. Inventory is trending down (slowly) as is days on market. Buying activity is definitely up. But values are not, yet. Like a broken record, I will say it again – if you are in the market to buy, pay the right price. If you are selling – make your house outshine everything else comparable to it right now, and price it REAL CLOSE to what you think it will sell for. In both cases, a reputable, local real estate professional is worth their weight in gold right now. And have you seen what gold values are doing right now?
We’ve got a link to the podcast if interested at www.DerenthalRealty.com/How-To. It’s well worth your time.
Feel free to drop me an email at mike@derenthalrealty.com.
by: Mike Derenthal, Derenthal Realty, www.DerenthalRealty.com
1520 Edgewater Drive, Suite E, Orlando, FL 32804
407-965-1919
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