Tuesday, September 9, 2008

The Political Season

Don’t you just love the political season? You can actually smell the BS in the air.

McCain-Palin now have the answer to the problems of Freddie Mac and Fannie Mae. You know my friends, understanding what happened in the housing and mortgage business is not that difficult. All you need to know is the definition of a few economic terms or words and you can understand what took place. The first word is market value. Market value is the price something will sell. Market value occurs when you have a buyer and a seller agreeing to exchange a piece of property at a set price. The asking price is the price the seller is asking for a piece of property. The appraisal price is the price someone, who knows the market of a particular area or sector, believes that conservatively the property will sell for. The problem occurs when the appraisal price exceeds the market value. To give a mortgage loan on a property whose market value is less than the appraisal price is courting disaster. When people have their monthly mortgage payment adjusted because they were encouraged to take out an adjustable rate mortgage, and the value of the house falls below what they owe on the house, people may choose to walk away from the house rather than continue to pay the adjusted upward new mortgage payment. When you have enough properties on the market at the same time, the market value of the properties will fall.

What if for example, everyone that owned a BMW put it up for sale at the same time in the United States? What would happen to the price of used BMWs? Do you think the price would go up if the market was flooded with used BMWs for sale? When there are too many houses on the market, the price of homes comes down too. Too many homes because too many people could no longer pay an adjustable rate mortgage payment on a house that was worth, market value, less than what they owed on the house.

A lot of the problems have occurred because of greed and sloppy business practices. As my old investment boss, Joe Hutton, once said, if you keep research files that reflects why you did what you did, they can’t prosecute you for being stupid. You have all seen videos for sale on cable TV called “Girls Gone Wild”, well there isn’t a video yet, but what we had in the United States was Appraisers Gone Wild. Putting a value on a house that has no or little relationship to the market value of the house is simply bad business practices and should be monitored. Oh, that would cost money and be expensive! Well, we hire people to go around a check scales and pumps to make sure the consumer is getting what he pays for. Isn’t the mortgage industry important enough to double check where these appraisal values are coming from?

Greed, greed, greed. It makes the world go round. My favorite song from the movie Cabaret is Money. And that my friends says it all. Money talks and bullshit walks. Home prices will come back because when the housing crisis is pasted, and builders are building new homes again, the price of the construction of the new homes will raise all boats. I told you, my friends this is not rocket surgery or anything difficult like that. Most of this stuff is just common sense, which I know, is not always that common.

Bottom line, I think the Federal government did the right thing in the case of Freddie and Fannie. There are millions of households in America that played by the rules, own one home or possibly two and are not flipping houses to make a buck. For all those families and the retired segment of our population, the government did the right thing. They just need to insure better and more comprehensive business practices when it comes to so many facets of the real estate and mortgage business.

My friends, Stay Tuned.

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