Sunday, March 30, 2008

BTMW – (BY THE MONEY WAY) – 3-30-08

Make of it what you will, and with all due respect (and we’ll leave up to you just how much respect they are deserving at this point), in reading extensively about the Bear Stearns debacle and bailout over the past couple of weeks, one couldn’t help but notice that an abbreviation for Bear Stearns is “BS”.

THE LENDING INDUSTY – MAKING MATTERS WORSE (3-30-08)

As noted earlier on these pages, the mortgage industry – having thrown prudent underwriting standards out the window over the past number of years, is (along with the investment banking industry), not solely, but greatly to blame for the current mortgage crises/fiasco, and, by extension, the extreme economic downturn of late. But, to add insult to injury, they now continue to make the situation worse. How? Rather than returning – as they should – to the common sense underwriting practices that had (for the most part) ruled the mortgage industry until the last few years, those in the industry (not all, but most) have now swung the pendulum way too far in the other direction. Borrowers with no money down, no income verification, and (in essence) no ability to afford to buy a home are now being denied financing (a good thing, and long overdue). But, additionally, borrowers with sizable down payment amounts, sizeable and steady incomes and good (sometimes, even very good) credit ratings are also being denied financing, or offered relatively poor financing terms (a decidedly bad thing).

The reason for this, of course, is that the mortgage industry, having gone on a bender of lending, and having caused all manner of havoc while doing so, is, like the person who got drunk and overturned all the furniture last night and, with a hangover, acts extremely contrite and cautious in the morning. That may work for the weekend partier – it doesn’t and shouldn't work in the lending industry. As harmful as the extremely lax lending practices of the last number of years was, so too is the overly cautious lending practices the mortgage industry is instituting today. For the economy to get back on track, the real estate buying/selling industry (and all the industries it effects -- builders, designers, furniture manufacturers and sellers, property
inspectors, appraisers, home improvement specialists, and lawyers, to name but a few), has to get back on track. And the only way that’s going to happen is for the mortgage industry to lend money to those who prudently qualify. But, because the lending industry is now under the microscope, they’ve gone into an overly tight, ‘cya’ lending mode (as one local mortgage rep., referring to the lending industry, stated recently, “It's just not nice out there right now and it’s getting worse.”

What can prospective homebuyers and refinancers do about it? Unfortunately, not a lot. It took the lending industry a number of years to get itself into this mess, and it will take time for them to get out of it (and, as an outgrowth, go back to the prudent underwriting standards they never should have abandoned in the first place). In the meantime, the few things consumers can do are: 1) recognize that unless you have pristine credit, very low down payment loans are going to be much more difficult to get; 2) Make concerted efforts the to raise your credit score (the technique for improving one’s credit on the BestMoneyinfo.com website is one place to start); and 3) seek pre-approval for a mortgage well in advance of when you plan to purchase or refinance, to find out what you can, in fact, qualify for in this tight lending market, and to learn from your prospective lender what specific things you can do to your financial situation to improve either your ability to acquire financing and/or improve the terms of financing you qualify for.

Monday, March 24, 2008

BTMW (“BY THE MONEY WAY”)

Couldn’t help but notice the irony last week, as the Casino bill was shot down on Beacon Hill during the same week when virtually everyone in the State (and the country, for that matter) was participating in one of, if not the largest ‘group’ betting activity of the year – the “March Madness” bracket pools. Indeed, one would not be surprised if some law makers were filling out their brackets (for ‘entertainment purposes only’, of course!), at the same they were finalizing their vote against casino gambling.

In any event, you best hope that you win your bracket (so you’ll have the additional funds needed to pay the new taxes that appear all but inevitable now).

COLLEGE LOAN AVAILABILITY UPDATE

A couple of weeks ago, much of the media caused a stir (if not a scare) amongst prospective and current college students and their parents, reporting that the credit crunch had also infected the college lending industry, and that many families could face difficulty getting the loans they needed for the upcoming academic year. As is so often the case when it comes to reporting financial matters, the media got it wrong – or, in this case, reported only half the story. What the media was talking about – but did not specify – was that these problems existed in the private college loan industry, which may (though not likely) have a shortfall of monies to lend,bit which certainly will offer less attractive terms then they have in the past, to some borrowers. What they failed to report in these stories was that anyone who’ll need loans for next year’s academic year should be able to get them, since funds for federally backed college loans will be available to anyone who needs them. Indeed, as Sara Martinez Tucker, US undersecretary of state made a point of noting when she was in Boston recently to speak at Northeastern University, the problems in the private college loan sector haven’t affected any federally backed loan programs (such as Stafford and Parent PLUS loans), and gave assurances that federal funds would be available to those who need them for the upcoming academic year.

ECONOMIC DOWNTURN AND REGULATION -- 3-24-08

Barney Frank was in town last week to talk about regulation. And, whatever else your opinion of his politics are, on this issue he’s right on the mark.

In Wall Street, Gordon Geco said greed, is good. Well, from what we’ve seen in the economy over the past year, greed is decidedly not good. Greed, along with deregulation has led to this mess.

For years, the mortgage industry in general, along with investment bankers, has lobbied to be allowed to, basically, act like commercial banks. But they’ve fought being regulated like commercial banks, saying “the market” could regulate itself. Well, that obviously has not been the case. The mortgage industry, with extremely lax regulation over the last number of years, has basically thrown underwriting standards out the window. And the large investment banking firms bought up these very risky mortgages, because they could package them and sell them to investors at very high profits. The problem is, they were building a house of cards, that was destined to fall. And they were allowed to do this, due to lack of regulation, and the greed that such lack of regulation leads to amongst, not all, but far too many.

The proof of that pudding is the fact that large commercial banks, which have remained relatively highly regulated over the last number of years, didn’t make or back the extremely risky loans like the mortgage industry/ investment banks did because, basically, they weren’t allowed to. And, while everyone has been hurt by the economic downturn, commercial banks, unlike so many mortgage companies and investment banks, remain relatively strong today as a result.

Who’s to blame? Lots of people, not the least of which being the mortgage industry and the investment banks who, basically, threw prudent lending practice/”risky” investment practice out the window. However, ultimately, Congress and the Bush administration is to blame for allowing this unregulated lending/investment fiasco to develop. And its not as if they didn’t have evidence illustrating the dangers of such deregulation. The

S & L crises of the late 1980’s and early 1990’s was, as we learned, greatly induced by lack of regulation.

What’s the bottom line here? Its twofold – 1st: Congress is only now finally realizing that the lending/investment industry as a whole has to be regulated. Capitalism works, but only to a point. Certainly, in this part of the economy, the markets decidedly do not self regulate. And without regulation, we get economic downturns like we have today, where everyone suffers. 2nd: While, it is imperative that Congress re-regulate, and soon, relative to this economic downturn, it, unfortunately, is going to be very much a case of closing the barn door after the horse has left.