Saturday, April 18, 2009

Fear Rules

Some months ago I was reading a report by an organization that tracks first mortgages, not first time mortgages, but mortgages on our primary residence. At the time there were roughly 51 Million first mortgages outstanding, of which about 3.4 Million were at risk or in foreclosure. That is less than 10%. I thought then, that if these mortgages were folded into the investment instruments that are considered toxic, then the exposure to the investor is really minimal, unless most of the bad mortgages ended up in one investment security which would be unlikely. The rule that forced investment firms to write down their investments should they be considered excessively risky was not a good rule, and I believe the government has rescinded that rule. Regardless, the investments supporting the underlying debt load were too bad.

What became bad was when financial institutions were forced to write down these securities as the housing bubble burst. The balance sheets of our largest financial institutions, not only in this country, but around the world became suspect and then began the run. So what about now?

Yes, foreclosures have gone up dramatically. There are several reasons, one is that mortgages were approved for people who were poor credit risks. Another reason is that as the home values plummeted in some areas people became upside down on their mortgages and could not get refinanced because they were now a credit risk, the underlying collateral didn't support the loan value, and banks were unwilling to take a hit on the value of the mortgage so no refinancing was available to those who needed it. There were those unscrupulous firms and/or persons who rushed loans through, committed fraud and deception, or out right lied to persons wanting to buy a home and got high risk mortgages approved. We still fall for the lure of "easy" money.

I have long maintained that our economy is in trouble because of perception. A lot of the jobs that have disappeared should've, real estate brokers, mortgage originators, financial analysts and securities brokers. I think a whole bunch of other spongers should be gotten rid of and the idea of actually working and creating objects of value be reinstated.

There are signs the economy is turning. I do hope the overvalued homes have shaken out, although I have a feeling home prices have not fallen enough yet. However, home sales have started to perk up. Yes, many of the homes being bought are foreclosures being snapped up for investment or by those who can afford the distressed prices. To build the strength of our economy on the practice of building newer and more expensive homes to replace smaller and very adequate homes simply to service a life style is not sound economy. It has to stop someplace, and perhaps it did. It was not the majority of the population that put our economy in the toilet, it was the minority and they should be accountable, instead we all pay.

Bunch of bullshit if you ask me.

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