The Subprime Meltdown

Ok, so I’m late to the party.

Every blogger, pundit and reporter has already been waiving their arms around for weeks now, trying to get their 15 minutes of fame from the subprime fiasco. Never mind that most of these hacks never saw it coming. It’s big news right now and everyone is chiming in, with thoughtful analysis.

So what could I possibly have to add?

The biggest issue if there ever was one, is the Opportunity. Yes, that’s right. This is a golden opportunity, carefully disguised as a total disaster. For two or three years now, I have been telling everyone who would listen to save money and they would have a great opportunity to buy property. Unfortunately, sound financial advice isn’t always popular. Especially, if it requires cutting back on spending in order to save money. But, here it is. The opportunity to pick up a house for prices not seen in years. And, it’s getting better daily.

The Dynamics of the Meltdown

So, how did I predict three years ago that real estate would crash?

  • Personal consumer debt had tripled since the ‘90s
  • Housing prices rose by double-digits, while real income was flat
  • Interest rates were historically very low and bound to go up
  • An unusually high number of houses were non-owner occupied
  • Mortgage regulation and underwriting standards were abandoned

Look, anyone paying attention could have seen this coming. When flippers are on TV with their own infomercials and your neighbor takes out a second to buy an H2, its last call at the party. It’s only a matter of time before the pros cash out and the amateurs get hurt. Doesn’t anyone remember the ‘80s?

The Victims

Unfortunately, in the cold hard world of finance, one person’s misfortune is often another person’s opportunity. Now, don’t get me wrong, I feel absolutely terrible for anyone who is losing a home. This has to be devastating to the affected people and their families. But, there is an immutable law of borrowing; that you have to pay money back. I truly feel sorry for anyone who got stuck with a rotten loan. But, keep your chin up. It’s not the end of the world. You may be able to rebound in a few years, with an affordable house and a stress-reduced mortgage.

The Scoundrels

Public enemy number one has to be the Mortgage Brokers. These smooth talking, bait and switching, commission-mongers are currently the poster child for all that is evil in the world. Are all mortgage brokers bad? No, of course not. But there are certainly enough bad brokers to give the industry a black eye.

Public enemy number two has to be our Government. You may have noticed that Congress and the President are suddenly “concerned” that people are losing their homes. And, regulators are pointing fingers faster than a downtown traffic cop. It’s amazing how poorly our Government serves the public interest.

Rounding out the top-four are Investment Banks and Hedge Funds. They seem to have invented a new way to profit, called a CDO, or a Collateralized Debt Obligation. This is just a nifty new way of packaging up non-conforming loans and selling them to Hedge Funds who speculate with your money. If you didn’t get stuck with an exploding mortgage, you may have seen your savings disappear.

The Bottom Line

No matter what anyone tells you, the cost of housing is based on the consumer’s ability to pay the loan. A young couple just starting out most likely can’t afford the mortgage on a $600K house. So, even if they qualify with a “liar loan” or a teaser rate, they probably won’t be in the house for long. That’s why houses aren’t selling and they won’t start selling until the prices come way down.

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