Commentary

Where Does The Money Go?

Where does the money go?

If you’re like most U.S. consumers, more than half of it goes to housing and transportation costs.

According to the government’s most recent Consumer Expenditure Survey, spending patterns are little changed from years prior. 

More money is spent on entertainment and less money is spent on dining out.  Beyond that, the figures are somewhat static.

Meanwhile, using on the survey’s industry-by-industry breakdown, we can see how monthly housing payments and daily commuting costs impact a household’s budget.

For the budget-conscious, going out less often and bargain-shopping can help pad the bottom line, but not as much as living in a less expensive home or moving closer to work.

Even a refinance into lower rates can make a difference.

Commentary

Happy Thanksgiving for Whom?

On Thursday, November 20th, Fannie Mae (FNM) and Freddie Mac (FRE) made a landmark announcement in regards to a temporary hiatus on foreclosure sales and evictions for a six week period beginning the day before Thanksgiving until January 9, 2009. At first read, politicians and consumer advocacy groups heralded the announcement as a win for troubled homeowners.

James Lockhart who is the director of the Federal Housing Finance Agency (FHFA) was quoted that the suspension would allow “delinquent borrowers…an opportunity to avoid foreclosure and work out terms.” It should be noted that this temporary suspension is an addition to the normal time-line required during the foreclosure process which is estimated by U.S. Department of Housing and Urban Development to be 3 – 6 months (subject to state foreclosure laws and processes).

For the homeowners on the brink of losing their home to the foreclosure process, the holidays will be a festive occasion removed from the reality of the housing crisis. This should bring a smile to their faces. FHFA, FNM & FRE look as if they are the champions to the financially strapped homeowners when they have been greatly criticized for the lack of proactive response to the housing debacle. The attorneys, law enforcement agencies and the judicial system who facilitate the foreclosure process also receive a reprieve from the gluttony of evicted homeowners during the holiday season.

To all of those mentioned, Happy Thanksgiving & Holiday Season!

For those on the other side of the foreclosure process, it is going to be an extended holiday stretch of dwindling business not of our own will. The professionals that will be negatively impacted from this action will be Realtors, appraisers, home inspectors, title companies, escrow companies, mortgage companies, insurance agents & real estate attorneys. This will be extremely hard on states in which stability of the housing market has been on the back side of foreclosure sales such as California, Florida, Nevada & Arizona.

No matter where you look, foreclosures have become a norm of the real estate landscape. The unilateral moratorium will only delay the inevitable flood of foreclosed homes to hit the market. It has taken the real estate industry more than 18 months to adapt to the new reality of the housing market.

Life is not like a video game. We can not press pause and wait for a better opportunity. In the eyes of this Certified Mortgage Planner, we must continuously move forward…good or bad. That’s Life! Happy Thanksgiving.

Commentary

The Big Scary ‘D’ Word

I am not referring to Democrats, Detroit or the Depression. The big scary ‘D’ word of the week has been DEFLATION. What is deflation? According to Dictionary.com Unabridged (v1.1) the word deflation is defined as:

1. the act of deflating or the state of being deflated.
2. Economics. a fall in the general price level or a contraction of credit and available money.

Everyone loves a good deal. I know that I have personally enjoyed the falling gas prices (< $2.00 per gallon) of late. With automobile prices being slashed, automobiles that I would have not considered in the past are viable options now. Even home prices have made once affluent areas more affordable to the average buyer.

You maybe asking yourself, what’s the problem with falling prices? A reduction in prices is a normal part of business and should be welcomed. The real issue with DEFLATION is the contraction of credit and available money. This goes beyond the headlines of bank lending.

You see, when prices begin to spiral downward the cash flow for a business becomes very restricted. This leads to cost savings measure which generally are linked to employment. With record-levels of unemployment, there is even less money circulating through an American economy that is heavily tied to consumer spending.

For those that survive the layoffs and pink slips, the fear factor (VIX) kicks in and also caps spending. This ultimately creates a vicious cycle of deflating prices that could lead to a depression. Deflation can be debilitating on the macro & micro economies of the world as non-rational decision making becomes the norm & fear drives purchasing decisions.

Be scared…be very scared!

Commentary

Who Cares About the BIG 3

On my drive to work this morning, I noticed the flashing digital sign in front of our local Pontiac/Buick dealership. All the advertisement declared massive reductions on prices. MSRP $29k…NOW $21k. MSRP $18.5k…NOW $15k. MSRP $23k…NOW $17.9k. You get the hint.

While taking in the blitz of markdowns, the talk on CNBC radio was the 2nd day of congressional hearings about General Motors, Ford & Chrysler (aka the BIG 3). I began to ponder the following question: What is all the clamor on capitol hill about the viability of the BIG 3?

In a normal business model, if you can’t get the execution right you will ultimately fail. Why would it be any different for the BIG 3? If they have a viable business model, go through legal options of bankruptcy and restructure. Learn from the mistakes and rebuild a better company.

If history is any indicator, the BIG 3 has had a reluctance for change which has led to its dwindling prowess in the auto industry as a whole. At the end of the day, what kind of message would you be sending to consumers if all they saw was that you are no longer worth it?

Commentary

Life is but a second from Change!

I woke up this morning to find our region blanketed by lake-effect snow. Was I ever surprised since the evening news made no mention of a winter snow advisory.

So the first thing I did was get dressed to go shovel my driveway, which is 24 feet wide by 30 feet long. By my estimates, the snow was about 10 inches on average. This equates to 600 cubic feet of snow that I had move around. I was not a very happy camper considering it was still windy and cold.

There is a saying in Northwest Indiana, if you don’t like the weather wait 15 minutes.

Out of no where, the sky cleared and the sun appeared. The warmth of the rays made the entire subdivision come to life. I could hear the kids joyfully having fun with the first major snow fall of the season. Even the neighbors with snow blowers began to pick up their pace and laugh about all the fresh powder that would most likely be nowhere to be found in a couple of days.

At the end of my unexpected workout, I also found a smile on my face with the thought of how my 3 year old son would react to his first anticipated snow fall. It was at that point that it occurred to me that life is but a second from change.

Commentary

Health Care & Mortgages…Not So Different

As I was reading the article “Employers Offer Workers Fewer Health Care Plans“ posted in this morning’s NY Times, it occurred to me that the article was very reminiscent of the mortgage industry. If you removed all the health care jargon from the article and replaced with mortgage lingo you would come to the same conclusion.

Commentary

I want to be like AIG!

You read correct. I want to be like American International Group, Inc. (better known as AIG).

As crazy as it may sound, I do wish I had the impact and relevance that AIG has on the world. Their reach transcends 130 countries & jurisdictions, as well as serving commercial, institutional and individual customers.

You may still be pondering the fact that they had a $150 billion loan restructured several days ago. Although their transactional business is in question, this plays directly into why AIG is such a great business model.

What? Huh? Are you kidding?

I wish this was a joke. Let’s evaluate why they are such an ideal model. Have you heard the term “systemic risk” spewed from analysts, government & investors as the underlying reason why this company was rescued, while others were left to go belly up.

According to National Futures Association, systemic risk is defined as “Risk that the financial markets as a whole will cease to operate or will operate inefficiently.” In otther words, to allow AIG to fail would have been catastropic for markets world-wide.

It is for this reason that you could aspire to be AIG. How awesome would it be to know that no matter what you did in life that no one would allow you to fail. Without you, everything would cease to function properly. You essentially become the commidity that no one can live without. WOW!

Commentary

The Obama Mortgage Effect

Whether you like or dislike Barack Obama there has been pre-emptive domino effect with Wall Street banks and government agencies that has the markets running in circles. Everyone knows that the subprime debacle, homeownership, foreclosures and devalued real estate markets have been in the headlines and a primary reason that Democrats did so well in the general election. Now that there is a president-elect the entire world has been carefully listening & dissecting the future agenda of the new administration.

• “Close Bankruptcy Loophole for Mortgage Companies: Obama and Biden will work to eliminate the provision that prevents bankruptcy courts from modifying an individual’s mortgage payments. They believe that the subprime mortgage industry, which has engaged in dangerous and sometimes unscrupulous business practices, should not be shielded by outdated federal law.”

It was Obama’s renewed vigor for this portion of his platform that forced the hands of the Federal Housing Finance Agency, Department of Treasury, FHA, Fannie Mae, Freddie Mac, FDIC, HOPE Now participants and major banking institutions to swiftly change the dynamics of their approaches and programs to assist distressed homeowners. These modifications appear to be beneficial to consumers on the surface in the short-term.

Unfortunately, it will be investor appetite for the underlying securities that create the capital to lend that will dictate the long-term effect of this Obama effect. Judicial loan modifications would create an asset that would carry greater risk than equities because a judge could modify the term, interest rate and principal balance. If investors have no guarantee that the assets they are buying have legal terms, they will either leave the market and/or require greater returns for their cash. This would ultimately cost consumers more and not less.

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