Posted by Chris | I believe the housing market will be in trouble longer than
most people think. It will take several
more months to determine who actually owns the subprime loans (lots are owned
by foreign banks) and how to work out the situation. Politicians will talk a good game about fixing the problem, but it’s much more complex than passing a bill. Expect a volatile stock market until this situation passes.
The markets are very nervous about the effects of the subprime loan situation. Subprime loans are loans made at less favorable interest rates – e.g., higher interest rates or adjutatble rate mortgages (ARMs). People who got subprime loans for their houses tended to have lower credit scores. Some borrowers obvioulsy couldn’t afford their mortgage payments, but lenders gave them subprime loans anyway.
Many borrowers slipped into foreclosure, and the loans lost their value. These folks are upside down with their home loans, and with a weak housing market end up selling their home for a loss. A lender takes the house is in the same position – selling the property for less than the money lent.
Wait, it gets better....
This is probably the first wave of foreclosures because the housing market is still weak and many of the borrowers have ARMs. As these adjustable loans are reset, the borrower’s mortgage payment is about to go up in some cases 20% or more. This will probably cause those who are on the edge of a personal financial ruin to create a second wave of foreclosures.
Add to this mix: the large homebuilding companies have a large inventory of unsold homes. Small time speculators and “flip that house” people are sitting on inventory -- and don’t forget about the condo glut. What does this mean? Lots of supply to keep home prices down.
Why does the stock market care? The mortgage companies bundled bunches of loans together to create an investment product called a Collaterlized Debt Obligation (CDO). These CDO’s were purchased by hedge funds, investment companies, etc. The value of the CDO’s were not priced daily (or ever), so the purchaser kept the value at the purchase price. Example: you purchase land for $100k – then you find out that it’s polluted and is only worth $70k. You pledged the $100k piece of land as collateral for other loans.
NOW YOU HAVE TROUBLE! In a nutshell, that’s the real problem with the stock market as it tries to grasp this situation. The investors in CDO’s have to determine what the CDOs real value is and how it affects their ability to borrow more money. The more money that is needed to fix these problems – could mean less money available for people to buy stocks.
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The foreclosure market appears to be expanding with no signs of relief. The combination of overextended sub-prime mortgage holders and an ominous economic slowdown indicate that this is a trend that is likely to continue for at least the next year. With all the negative news in the wind, should you venture into foreclosures now or wait for the bottom of the market to hit?
http://www.thejohnbeck.tv
Posted by: John | December 08, 2007 at 12:25 PM