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IWP!, flagship product is Chicago's premiere real estate Investment
magazine. Entitled Invest With Passion!, it is the tool for investors and professionals in the
Mid-West. The publication seeks to grow it's market share by providing
powerful information designed to build the reader both as an investor and a
person.
Since it's release in January of 2006, the magazine has been well received and
continues to gain momentum and support. The education, information, and
networking opportunities for the real estate investor has been long neglected.
No More!
The time is now and the momentum is building.
It's Happening!
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THE
MORTGAGE MELTDOWN
By Greg
Elberg
This article explores the history of the mortgage
meltdown of 2008 and the likely consequences to the public. It looks back
at the savings and loan crisis of the late 1980s for comparisons. The
effects on commercial finance, purchase order financing and accounts
receivable financing are also discussed.
Banks lend money to people and businesses. The money
is used for investment purposes and consumer purchases like food, cars and
houses. When these investments are productive the money eventually finds
its way back to the bank and an overall liquidity of a well functioning
economy is created. The money cycles around and around when the economy is
functioning effectively.
When the market is disrupted, financial markets tend
to seize up. The liquidity cycle may slow, freeze up to a degree or stop
completely. This is true because banks are highly leveraged. A well
capitalized bank is only required to have 6% of their assets in core
capital. It is estimated that the residential mortgage meltdown will cause
credit losses of about $400 billion dollars. This credit loss is about 2%
of all U.S. equities. This hurts the bank’s balance sheets because it
impacts their 6% core capital. To compensate, banks have to charge more
for loans, pay less for deposits and create higher standards for borrowers
which lead to less lending.
WHY DID THIS HAPPEN?
Once upon a time after the Great Depression of the
1930s, a new national banking system was created. Banks were required to
join to meet high standards of safety and soundness. The purpose was to
prevent future failures of banks and to prevent another disastrous
depression. Savings and Loans (which still exist but call themselves banks
today) were created primarily to lend money to people to buy houses. They
took their depositor’s money, lent it to people to buy homes and held
these loans in their portfolio. If a homeowner failed to pay and there was
a loss, the institution took the loss. The system was simple and the
institutions were responsible for the building of millions of homes for
over 50 years. This changed drastically with the invention of the
secondary market, collateralized debt obligations which are also known as
collateralized mortgage obligations.
Our government created the Government National
Mortgage Association (commonly known as Ginnie Mae) and the Federal
National Mortgage Association (commonly known as Fannie Mae) to purchase
mortgages from banks to expand the amount of money available in the
banking system to purchase homes. Then, Wall Street firms created a way to
expand the market exponentially by bundling up home loans in clever ways
that allowed originators and Wall Street to make big profits. The big
stock market firms were securitizers of mortgage-backed securities and
resecuritizers who sliced and diced different parts of the groups of home
loans to be bought and sold in the stock market based on prices set by the
market and market analysts. Home loans, packaged as securities, are bought
and sold like stocks and bonds.
In the quest to do more and more business, the
standards to get a loan were lowered to a point where, at least in some
cases, if a person wanted to buy a house and could assert they could pay
for it, they received the loan. Borrowers with weak or poor credit
histories were able to get loans. There was little risk to the lender
because unlike the earlier days when home loans were held in their
portfolios, these loans were sold and if the loans defaulted the investors
or purchasers of these loans would take the losses (i.e. not the bank
making the loan). The result today is tumult in our economy from the
mortgage meltdown which has disrupted the overall financial system and
affects all lending in a negative way.
WHO IS RESPONSIBLE FOR THIS SITUATION?
All loan originators, including banks, are
responsible for turning a blind eye to loans that were based on poor
credit criteria. Under the label of “subprime” loans there were low
documentation loans, no documentation loans and very high loan to value
loans - many of which are the foreclosures we read about on a daily basis.
Wall Street is responsible for pumping this system into a financial
disaster that may grow from the current $400 billion dollar estimate to
over a trillion dollars. Realtors, mortgage brokers, home buyers and
speculators are responsible for their willingness to pay higher and higher
prices for homes on the belief that prices would only go higher and
higher. This basically fueled the system for the mortgage meltdown.
ARE THERE ANY SIMILARITIES TO THE SAVINGS AND LOAN
CRISIS OF THE 1980s?
Between 1986 and 1995 Savings and Loans (S&Ls) lost
about $153 billion. The institutions were regulated by the Federal Home
Loan Bank Board and the Federal Savings and Loan Insurance Corporation.
These entities passed laws that required the S&L’s to make fixed rate
loans only for their portfolios. The rates that could be charged for these
loans were determined by the marketplace. Imagine an institution with $100
million in loans at 6% to 8%. For years, the interest rates on deposits
were also regulated by the government. The interest rate spread between
the two allowed institutions to make a small profit.
In 1980, the U.S. Congress passed the Depository
Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). A
committee was established in Congress. Over a period of years, the
committee deregulated the rates S&Ls could pay on savings. Nothing was
changed with respect to what could be charged for home loans. Many
institutions started to lose huge amounts of money because they had to pay
market rates of 10% to 12% for their savings; yet, they were stuck with
their old 6% to 8% loans. Some executives in the savings and loan business
referred to this committee as the “Damned Idiots” in Washington.
Many books have been written about these events.
There is documented evidence of substantial wrongdoing by S&L executives
who were trying to invest funds to save their institutions, sometimes for
personal gains. Some were sophisticated criminals. Congress recognized
their mistake in 1982 when the Garn-St.Germain Depositary Institutions Act
was passed to allow S&Ls to diversify their activities to increase their
profits. It also allowed S&Ls to make variable rate loans. It was too
little too late. After bankrupt institutions were liquidated by the
government, the surviving S&Ls were assessed billions of dollars by the
Federal Deposit Insurance Corporation (FDIC) to replenish the fund that
insures the depositors of all U.S. banking institutions. The mortgage
meltdown and the savings and loan crises are similar with regard to the
presence of greed and criminal activity. They are very different with
respect to the fact that the S&L crises originated from a broken
government mandated regulatory system and the mortgage meltdown has been
caused primarily by a system that went wild with greed.
This has impacted non-bank lenders such as private
commercial finance companies that provide hard money real estate loans,
purchase order financing and accounts receivable financing. Most of these
firms have raised their prices and their origination standards for safety
and soundness of operations.
THE BOTTOM LINE:
Bank lending can be replaced by other sources such as
commercial finance companies to some degree. Hard money, purchase order
financing and accounts receivable financing will help some businesses grow
during these difficult times. But for the average borrower, businessman,
or business owner, these are difficult economic times, caused by the
mortgage meltdown, which are here to stay for several years.
*****************************************************
Mr. Elberg is a licensed attorney and licensed real
estate broker. Gregg Financial Services is a full service brokerage for
commercial finance companies and banks that fund B2B businesses. We work
with all industries and can arrange financing transactions throughout the
US and Canada, Mexico, Australia, India and several areas of Europe
including the UK, Ireland, France, and Poland. Mr. Elberg arranges funding
from $25,000 to $50 million per month at competitive pricing, and works to
reduce your financing costs as your company grows. For more information
about GFS, please call 888-482-9221 or visit our website:
http://www.greggfinancialservices.com |
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