June 2006: 92,000 foreclosures. July 2007: 179,000 foreclosures.
In the mortgage industry, 38,000 jobs were lost last month. Nationally, the sales figures for homes was the lowest in the last 16 years.
American Home Mortgage's share price in February 2007 over $30 per share. Today the company is bankrupt. Home Depot and anything related to home building have dropped about 30%. The shares of KB,Toll Bros., Beazer, Centex and other homebuilders have lost more than 50% of their value.
Bank of America had to come in and buy two billion dollars worth of preferred Countrywide Credit shares to try to keep it afloat.
Those were the July figures. Figures for August are due, which will be bringing even worst news as more and more loans adjust upwards from their original teaser rates.
According to Cramer (MSNBC) in the last two years over 7 million people bought homes on "teaser" rates (very low initial monthly payments for a short term and then "adjusting" to market levels). In some cases home payments have doubled when adjusting takes place.
The money to buy a home doesn't appear magically. There must be investors willing to buy these loans. Typically the mortgages are bundled and sold to investment banks who then turn around and sell the to the investing public. The bundled mortgages are known as MBO's (Mortgage Backed Obligations).
The problem today is that no one knows how to price these bundles due to the fact that no one is sure how many of those loans will fall into foreclosure. Hedge funds have lost millions. One of the largest banks in France stopped redeeming shares because they had no idea how much the shares were worth.
HOW DID THIS HAPPEN?
As Louie in Casablanca used to say "Round up the usual suspects".
Wall Street for bundling these loans. Included in this group are Bear Stearns, Lehman and Goldman Sachs.
Pension managers who bought these loans in the hope of higher yields to cope with the ever growing number of retirees. Baby Boomers are living a lot longer than anyone expected.
Mortgage brokers who created fraudulent applications. (I know a lady from Peru. She is undocumented. Has never worked on the books, never had a bank account, no social security number and she bought a $400,000.00 home in Sylmar.) Accountants and tax people who rigged phony returns in cahoots with the brokers and the real estate sales people.
Real Estate Sales Persons who sold homes to people that should have never bought one.And finally people that bought homes who believed that real estate always goes up. (Doesn't anybody remember the 90's when homes dropped as much as 20%. Remember the term short sale?)
All investments have a degree of risk, including buying a home. Gordon Gecko is alive and well and hosting open houses near you.
BERNAKE TO THE RESCUE! (A Bush appointee)
The Fed has added liquidity to the system. If not for their skillful handling of the present crisis things would be a lot worse. By allowing institutions to use the MBO's bundles to borrow funds the Fed has kept the credit markets alive.
The Fed has also lowered the rates on what is known as the window where banks and other institutions borrow overnight to meet cash demands.
Finally by cutting the discount rate Bernake has not only added liquidity to the system but has helped millions of homeowners as the ARMS (adjustable rate mortgages)are closely tied in to the discount rate. By lowering that rate, Bernake has made it possible for many homeowners to keep their homes.
WHAT TO DO NOW.
If you have bought a home in the last three years take the loan documents and have them examined by an attorney who's specialty is real estate law. You MUST know what your current situation is in order to protect yourself. DO NOT CALL YOUR FRIENDLY REALTOR WHO SOLD YOU THE HOME. The $100 to $300 you pay the attorney will be well worth it.
During the next 12 to 18 months, the market will bottom out hang in if you can. Remember that the real price of a home is not what you think its worth. The real price of a home is the price someone is willing to pay for it not the listed price. Everything else is fantasy.
If you do not own a home, wait. Phony buyers are now non-existent. The subprime buyers are history. Without the demand from subprime buyers prices of existing and new homes will drop.
Beaumont, California a home built by Beazer homes that sold for $450,000.00 recently was auctioned for about $300,000. That is a $150,000.00 LOWER than a year ago.
Use this time to improve your credit score. Save as much as you can. Then when homes drop in price you can buy. But wait. In the next 12 to 18 months people with adjustable rate mortgages will be facing payments that will be 20 to 100% higher than they are paying today, thus causing more foreclosures and lower prices.
MORAL OF THE STORY.
One plus one is always two. Markets tend to bubble. Gold in 1970's ran up to over $800 an ounce. Thirty years later it still hasn't reached that price. Silver went ran up to over $50.00 an ounce when the Bass brothers tried to corner the market. Silver is trading at $11.00 plus and ounce. The Dot Com market of 2000 finally ran into reality. Real Estate has been in a one plus one equals three.
The party is over.
Alberto Marrrero Salas:
Alberto Marrero Salas. Spent 13 years as a vice president with Merrill Lynch in Los Angeles and with Prudential Bache in Pasadena. Retired in 1989. Now partner in law firm Nacara 2000 where we practice immigration law.