Saturday, August 25, 2007

Banks Reap, what they have Sown

The last several months in the home sales and finance industry has been a very tumultuous one. It has been one for me personally as well, but not in the way you are thinking. I currently don't own my home, I rent, and my landlord paid cash for the property as therefore is not leveraged on the home. Where this effects me however is at work, for those not aware my day job is that of a Small Business Financial Specialist for one of the largest banks in the United States. My position is unique in that it allows me to see to the banking needs of small businesses, as well as the personal financial needs (Not just banking) the owners and employees as well. My comments that follow are mine, independent of my employer and are impressions I have based upon 8 years of experience in the Banking industry. This is further supplemented from lessons learned in my college Macro Economics class.


Hopefully the title of this post is providing you with some idea of my angle with the current housing correction. I could quite possibly test the limits of this blog going into the economic details of the Housing industry, with the corresponding Home Finance industry but you and I both don't have the time to read (or type) into such detail so I'll do my best to avoid any tangents. The current financial and home sales situations are a reaping of our own general greed. For the majority of the last few months, I've viewed the primary culprit as the greed of the mortgage industry, but as I've dived deeper into the stories being told, and the things I've personally observed as a lender, I can not leave blameless what has also been a prideful lust of material wealth on the actions of the borrower/home owners. Both of these view points will be addressed.

Everyone has seen those signs at the intersection teasing you with mortgage rates of 1.25%. Well in the itty-bitty print under the big print was that 1.25% was in index payment, not the interest rate. These were Adjustable Rate Mortgages, with rate increases as soon as 12 months, payment re-cast (Re-Amortization's) as soon as 3 or 5 years. Now the ARM mortgages, teasing with low variable rates aren't an evil thing, they have there purposes, but during the housing boom of the mid 2000's, their features were abused by the mortgage industry to get quick easy sells, and to entice buyers into mortgages too large for the average buyer.

A great example of this was a recent tactic used at the start of this year in my development. KB Homes, who was in the process of liquidating their inventory here was advertising new homes with payments as low as $525/mo. Now the cheapest properties available at this time were still high with discounted prices floored at 170k. 525.00 a month is a p&I payment roughly for a 65-75k loan (I'm estimating in my head with that figure, but it's not a gross example.) The problem with this scenario is that ARM's are meant for short term borrowing, often used by home investors and executives who often find themselves moving every 4 to 7 years as they advance with their companies. During the housing boom however, the low monthly payment features (including Pay-Option ARMS with the interest deferring index payment) to put borrowers into homes they otherwise wouldn't be able to afford using a conventional 30, or even a now used 40 year Mortgage. Furthermore the effects were amplified by offering up to 100% financing with the interest deferring Pay-Option versions of the ARM, with the index payment deferring interest, the balance due on the mortgages often at times was racing the market value gains during the market boom.

The final dagger and what had proven the most deadly feature of these products is the rate increases and payment recast. The first, rate increases may not seem that bad when you look at a increase cap of 2% (going from 5% to 7%) However a increase of 200 basis points (2%) on the loan rate equates to a 20% increase in the payment. (i.e. a 1000.00 min payment is now 1200.00.mo) The second dagger in this feature is the payment recast. What this is basically is a reset of your minimum payment for the mortgage. Often times, based on the variables of rate environment and the number of index payments made (deferring interest) a consumer could realistically see a payment increase in excess of 1,000.00. Magnifying this effect here in Florida, most notably in the South Florida is the skyrocketing escrow cost associated with Homeowners Insurance and Property Taxes. I've personally seen a few clients experience increases of more than 150% in their Insurance premiums. That's a discussion for a later time.

It was very irresponsible for the mortgage industry to recklessly lend out money, leveraging the American Dreams of many with fully financed Adjustable Rate products. It was a recipe for disaster, the Market Correction that we are currently experiencing was long fore-told by analyst. Honestly, anyone who had paid attention in their Economics classes in High School and College could had seen this day coming in the Real Estate industry. There comes a point when a products market becomes saturated with both supply and demand. When this pinnacle is reached, a tumble will happen. Unfortunately the rising rate environment fueled by the Fed Board resolve to restrain inflation helped to pull the correction in the R/E Market a little faster.
The American Economy is a resilient one and will survive this. There will be a price. We can lower rates now, but risk a skyrocketing inflation rate, that could potentially mirror that experienced in the 1970's. The option I feel is to allow the market and Economy do what it does best on it's own, Correct and Recover. Any interference on the part of the Federal Government will only magnify these events (and please note that Corrections come BEFORE the recovery....so contemplate if you want the Government magnifying a correction) A government bailout of the housing industry would have much the same effect as a near none existent lending rate, which is essentially free money. This would in turn provide inflationary fuel to the market necessitating further INCREASES in the Federal Funds Rate and soon we'll be thinking that Carter is back in the White House.

The ramifications of the housing and mortgage boom of the early-mid 2000's will be painful, but as we look back to view what went wrong, make the necessary changes needed to protect the market from suck vulnerabilities we will create an even stronger housing market, supported by a more stable lending/borrowing environment for the Home Owners and the Banks. Something said in a training meeting on our "Pick-A-Pay" Pay Option mortgage product (Brought over with the Golden West/World Savings merger) has stuck in my head and applies well to this scenario, "If you protect the customer, you protect the Bank." Lenders such as Countrywide and the Sub-Prime lenders were looking out only for their stock value and wallets. Now, they are reaping what they have Sown.

(Note: Wachovia's Pay Option product, the Pick-A-Pay Mortgage is note a "Pay Option ARM", it has a lower foreclosure rate than the Nationwide average on conventional 30 Year Mortgages. With a maximum 80% LTV, and limits on Index Payment increases, 7.5% versus 20% on Pay Option ARM's, It provides options and protection that help ensure that the borrower is protected from foreclosure as much as possible on the Lender's part. For more information about this solid product, please refer to Wachovia's Website.)

Monday, August 20, 2007

Cars, Cars, and American Cars??!!

Well the unthinkable happened this last week, Toyota's Lexus brand was supplanted, and done so badly by the tadem of GM (Buick and Cadillac) and BMW over taking the reigning japanese brand in the area of Customer Satisfaction, which is actually saying alot given the great distain for BMW's I-Drive system. But bigger than that is the recent improvements in quality ratings for two of Detroit's Big Three, GM and Ford. Where as GM of late has seen profitable improvements through cost reduction going so far as to eliminate an entire brand (Oldsmobile) as seen improvements in it's Mechanical quality. This would prove beneficial for GM if they will now match that with quality material and workmanship on the interiors. Even in the Cadillac brands are cheap vinyl plastics found in abundance. Ford in the flip side has still stuggled in reaching a profit while as seeing vast improvements in both material quality and mechanical workmanship seen most dominately in the Focus and 500/Taurus sedans as well as their Lincoln/Mercury clones. That being said, Ford as waited till the 2008 Model year to place a sufficient engine in it's mide sized/full sized sedans. The previous 500, now renamed Taurus will see a nearly 65 HP increase from the '07 to '08 Models years as the Taurus is now presenting a comparable engine option against the Japanese offerings. Of course, this is still behind the trends as Toyota is offering a 270HP+ variant of the 300+HP V-6 found in the Lexus GS and IS models and Honda is rumored to looking at a 300HP V-6 for the newly re-designed Accord line set for launch this Fall (And it looks REALLY sharp too!!) Speaking of Honda, the focus on the new Accord has allowed another redesign (a little bit) to slide under the radar, that being the S2000 CR, a more powerful version of the already nimble S2000 roadster. This car will be fast, and ever more fun than it's base version!!!

More Useless Information..

Has been posted on our "Pit of Useless Information" Blog. Check it out!!!!!

Wednesday, August 15, 2007

Baseball Notes

Just a couple of notes and commentaries about the current baseball season;

-Last night, Atlanta Braves skipper, Bobby Cox, was ejected from a game for the 136th time in his career, setting a new Major League Career Record. Normally getting thrown from a sporting event isn't much to brag about, but for those who've followed the Cox lead Braves since the 1991 Season have learned to appreciate this record. Pretty much every ejection has come in the defense and protection of his players. The professionalism of the Braves organization is alot about Bobby Cox, who expects the best of his players, and will give it all to defend and protect them. Last night, the record setting ejection came as Bobby was keeping All Star (and future Hall of Fame) 3rd Baseman, Chipper Jones from being ejected as he debated a bad call from the Homeplate Umpire (Replays clearly supported Chipper and Bobby's position on the matter.)
Bobby Cox, sure 1st Ballot Hall of Famer himself as a Manager, is and will forever be a players Manager.

-Speaking of my beloved Bravos, they showed great championship contending form in beating the SF Giants thanks to a walk-off double off the bat of the afore mentioned Chipper Jones. The NL East Div has been put on alert, with the addition of 1st Baseman, Mark Teixiera, The Brave arguably have the most potent line up in the National League, possibly even in both Leagues.

-In the shadows of the tainted efforts of a Outfielder we'll not name comes a truly inspiring story in St Louis. For those not paying attention, may still remember the disastrous ending of the Pitching career of South Florida (Treasure Coast) Phenom, Rick Ankiel. Some remember the wild pitches so far off that, it would make my 4 yr old nephew look like Greg Maddux. Well, note I specified the PITCHING with the career, because 3 years later, Rick is back in the Majors with the STL Cardinals, playing OUTFIELD. This is no gimmick! And trust me when I tell you that the value of my Rick Ankiel rookie cards are about to go back up! The kid can hit! Not just for average either, check these stats from Ricks first 5 Games, 22AB, 7 Hits, 3 HR's, .773 SLG, and .318 Avg. Not bad for someone who was ready to walk away 2 years ago. Rick has had at least one hit in every game he's played so far (knock on wood), and is playing solid defense in Right Field, where his strong arm will come in handy!! Those of you out there looking for a truly inspiring story from this years baseball season, you need to look no farther than Rick Ankiel.

Monday, August 13, 2007

Things to sleep on part 2.

NEWSFLASH!!! TROPICAL DEPRESSION FORMS IN EASTERN ATLANTIC!, MORE INFO TO COME ON THE 11 O'CLOCK NEWS!!!!!!

Here it comes, what was referred to the "The Real Hurricane Season" last night at a meeting I attended. Well in light of the recent formation of tropical depression 4, I thought I'd borrow from Dave Letterman and create my very own top 10 list...

The Top 10 Reasons you can tell that the Hurricane Season has begun.
10. (Remember...the list starts here) The 5 O'clock Weatherman in Panquitch, UT is now a self declared "Hurricane Specialist."
9. Dan Billow, of WESH-TV Orlando (NBC) asks for a Office position (That one is for you Mick!!!!)
8. Every freaking network runs a 5 night Documentary on surviving hurricanes.
7. Hurricane Tracking inserts begin to show up in the Newspaper.
6. You begin a tri-weekly fast to prepare your body to appreciate the delicacy known as the M.R.E. (Or other dri-packed Meals also Rejected by Ethiopians)
5. You program the TV to SKIP The Weatherchannel.
4. Bloomberg TV, C-SPAN, MSNBC are no longer safe havens to avoid the "Hurricane Over Hype."
3.. You need a new fire extinguisher after the recent test of the generator bought from the guy in the parking lot with the "Great Deal."
2. You're on 2 weeks medical leave because you "Didn't need Help" from the guy at Lowes when loading the new Generator.
1. Blocking the Weatherchannel.....CANT STOP JIM CANTORE FROM APPEARING EVERYWHERE!!!!!!

OK.....Top 10 List #2..... Top 10 New Slogans for Hurricane Season (Um...for Floridians)

10 (Again...for Mick) Dan Billow Whine about the "Stinging Rain" Season
9. Like a Good Neighbor, State Farm is ....where?
8. You're in Good hands, unless you're with AllState.
7. MRE's, Its what's for dinner!
6. Hurricanes, the South's new defense against Northern invasion.
5. Citizens, it's your back-up "Good Neighbor"
4. Vanguard, it leaves YOU on guard!
3. Beach Sand pumped on today, eroded tomorrow.
2. Storm! It's the other "Surge."
1. (This one is for Me-Ma)
Hurricanes: The New Immigrant and Yankee Population Control

Monday, August 06, 2007

Things to Sleep on...

OK, I know the title is a pretty hokey pun, but don't blame me...I inherited the trait from my dad.

1. BMW has begun releasing details and marketing for the highly anticipated 2008 M3. The new car breaks from previous generation models in now coming equipped with a V-8 Engine. The 4.0 Liter power plant is expected to produce in the area of 413 HP and propel the Uber-Auto to 60MPH in about 4.5 seconds. However if you are looking to buy one, you had better start saving long before the car goes on sale in the Spring of '08 as the car is expected to demand a price north of Sixty Grand ($60,000).

2. For those of you heartbroken over the end of point one, take heart because the M3, while the most exciting to drive, is not the big head turner for BMW in the '08 Model year. That Honor would go to it's 1-Series line which to this point has only been sold in Europe. Now BMW has decided to bring the car overseas to the US with two models, the 128 and 135 Models, both packing class leading v-6's, with the later producing over 300 HP!!!! It is rumored by some that the 135, which also will come with a M3 inspired aero package and suspension components (Including 6 caliper disc brakes on the Front) could possibly provide the driver with a sub 4.5 0-60 times with price tag UNDER Thirty-Four Thousand Dollars ($34,000). I don't know about you, but a sporty coupe with these numbers, and BMW's meticulous engineering and quality, the 1-Series line of cars could prove a money-fall for the makers of the "Ultimate Driving Machine."

I don't know about you....but I'm really starting to think my next car will be a Bimmer!


OH YEAH!!!!! I can definantly see this car parked in front of my house!!!
Only question left to ask is....Does in come in Dark Blue with a Tan Interior???