Bailouts and the market

I had a closing last night; and, my clients ask what effect the current situations with Merrill-Lynch, Lehman, and AIG will have on my industry. I told them that the current crisis is the continuing ripple effect from the mortgage meltdown from this time last year.

In August of 2007, my company had a near record month. The following September was a near record low for closings. In other words, the bottom fell out of the real estate market. We had a mortgage meltdown. There were hundreds of mortgage companies imploding and closing. These were all the "evil" subprime and non-conforming lenders that you have heard about.

However, what usually do not hear is that most of these "B-C" lenders is that they were owned by the big banks and financial companies. Here are a few: Equibanc owned by Wachovia, Equifirst by Barclays, Option One by Lehman, America's Wholesale Lender and Full Spectrum Lender by Countrywide, and First Franklin by Merrill-Lynch.

With this combination of the subprime meltdown and the mortgage backed securities, it is no wonder that Merrill-Lynch and Lehman failed. The bad loans made and almost worthless securities that they invested made it an impossible situation for them to stay solvent.

There may still be some fallout from the mortgage backed securities, but it may not only be in the U.S. China owns a lot of these securities as well. We will have to wait and see when or if the other shoe drops.