How to fix it!

Here is how to fix the financial crisis.

1. Suspend "mark to market" accounting. This will eleviate the credit crunch, IMMEDIATELY! This can be done by the President without Congressional approval
2. REPEAL SORBANES-OXLEY! This was a bad law in response to another crisis. Remember, Enron and all those guys. As a side note, I think that it is interesting to have a law named after a man serving time (Oxley).
3. Have a loan-out not a bail-out. Have these troubled or credit crunched institutions BORROW the money from the Fed. Don't just give them the money for the bad business and bail them out. Allow them to borrowe the money at the Fed rate plus 2% for 5 years.

All this from ONLY 5% of all loans out there. Amazing how such a small part of the financial markets can mess it up for everyone.

Old Article is prophetic!

A friend of mine sent me this old article from September 30, 1999, by Stephen A. Holmes. It totally forshadowed everything that we are going through with the finanical crisis.

Please read and enjoy.

September 30, 1999
Fannie Mae Eases Credit To Aid Mortgage Lending
By
STEVEN A. HOLMES

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites. Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes
increased by 31.2 per cent. Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating llegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

Wow, it is like reading Mein Kampf in 1933, uh.

The Deal and the Do Nothing Congress

Trying to digest the bail out deal. On its face, it seems adequate.

However, one of the problems in this whole deal, it how the congressional leaders (Nancy Pelosi, Barney Frank, Harry Reid, Chris Dodd, et al) come out like they are saving the country while blaming the Bush administration. Meanwhile, totally ignoring their role in this whole mess.

Congress has oversight over Frannie and Freddie not the administration. It is Congress' job to monitor them; and, Congress turned their eyes away from the impending problem. It was not like that they were not warned. Alan Greenspan told them about it over two years ago. McCain even introduced a bill to correct the problem. Congress did nothing. Not only did they not do anything, they encouraged Frannie and Freddie continue and escalate their practices.

Now, as I have said before, there is plenty of blame to go around, including the current and past administrations. But, the fact that the democratically led "do nothing Congress" are trying to ride in on their white horses to save the day and take credit for everything is ridiculous! However, this is how they have acted for the two years that they have had control.

Flap their lips, but do nothing.

I am not crazy or alone in my thoughts.

Here are some articles that I read AFTER I wrote my blog. Actually, the mortgage meltdown was written as an article last year.

This one is by Drew Zahn on WorldNet Daily:

http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=75717

This one is by Kevin Hassett on Bloomberg:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0

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.

Who is the blame for credit crunch and mortgage meltdown?

Who is to blame for the credit crunch and Wall Street meltdown? I believe that there is plenty to go around. There are four parties that should share the majority of the responsibility. They are the government, lenders, brokers/realtors, and the homeowners. The burden is not equally distributed. I believe that the less of the burden falls on the brokers and realtors than on the others. Let us look at each and see what their role was.

First is the government. The federal government has been for the last 10 years wanting more homeownership, especially for the lower income people. Every President (Bush 41, Clinton and Bush 43) in their State of the Union Addresses have all profoundly stated this with resounding applause from everyone in the gallery regardless of which side of the isle they sat? For whatever reason, lower income people seem to have less than stellar credit. So, to qualify them for loans (regardless if they are back by the government), you have to loosen the criteria for qualifying for the loan. Congress (Barney Frank et al) did nothing to rope in the run-amuck GSE’s (Fannie Mae and Freddie Mac).

With pressure from Washington, comes our next participant, the lender. The lenders hearing what our elected officials wanted began creating so very creative loans and greatly relaxed their lending criteria. Some of these loans include 2/28 and 3/27 ARM’s, 100%, interest only, buy-downs, and my favorite “pick-a-pay”. You have heard these advertised for the last 5 years. I know that some of these loans have been around for a longtime, but for a very sophisticated client. However, the problem arises when the wrong type of borrower gets one of these loans; and, they are not very discipline in the managing their money.

With these loan programs in hand, the lender sends out their account managers to mortgage brokers to sell them. The mortgage brokers can now refinance very marginal borrowers and help the Realtors© sell more homes. Of course, the Realtors© get really excited because they have a new batch of clients to go after. Working together, the mortgage brokers and Realtors© sell these loans to this new batch of home buyers. Now, as I said before, the realtors and mortgage brokers are less to blame than the other parties. Blaming them is like blaming a car dealer for selling the Pinto when Ford was building it and the government pushing for higher mileage cars.

The last party is that of the borrower or buyer. This party has seemed to receive no or very little blame at all. They get the most sympathy and some are looking to be bailed out. The media and Congress think that these people are ignorant and had the wool pulled over their eyes. I disagree. Every closing that me or my company has done over the last five years (which is almost 5,000), those borrower knew exactly what kind of loan that they were getting and what the conditions were. They new the risk and took it. Their life situation may have changed; or, more than likely, they did not follow the advice given to them about not running up their debt again. Now, they want to be bailed out.

There is plenty of blame to go around. This is a major correction cycle. The best way to get through it is to ride it out. The worst thing that could happen is for Congress to make a knee-jerk reaction and pass some over bearing law that will REALLY kill the industry.