Saturday, 27 September 2008

• The real problem......

  I posted this as a comment at Steve's blog and decided I needed to capture it so..........

   

  Wow if only things were that simple. Amazing as it sounds alot of the homes that have been forclosed on were never actually occupied. Remeber "Flip this House" and various other shows that tought you how to buy a house fix it up and then sell it within 30 days? Well guess what, when the prices started coming down those folks couldn't sell those houses. With loans being available for 0 money down, no financial disclosure, intrest only, and adjustable rates people were using houses as investment tools. Also don't forget new home construction. Contractors borrow money to build houses hoping someone will buy them. With more houses to sell then there are buyers the price can only come down. Now these folks are upside down on the loan and even if they can sell it they will lose their investment. With those prospects it was/is cheaper for them in the long run to just walk away or sell short (for less then what they owed) and leaving the banks to absorb the difference. That was the first shoe to drop we are still waiting for shoe number two. The adjustable rate mortages which people used to buy homes they couldn't afford, these are the ones people live in. Those are set to re-adjust in the first quarter of 2009. The tail spin we are currently in will just get faster and deeper.

  Part 2. Can't we just take the bad loans and restructure them to help out the borrower? The answer is yes and no. The banks/mortage companies that made the loans packaged them together in bundles they sold as securities, investment instruments. These packages were sold to who ever wanted a piece of the action. In fact one package could have been sold to alot of investers. Everyone that bought in was guarranteed a percentage of the pie. These were bought and sold like stocks. Short term investments even though the notes were made for 30 years. So in order to re-structure one note the bank would have to buy back the entire package with interest from the investers who bought it. Then take out the note in question, re-structure it put it back into another package then re-sell it. Not too bad you might think. Well now the security (package of loans) can not be rated as risky and it's likely that no one will want to buy into it. Banks lose.

  Lose-Lose all the way around. The bailout will prop up the banks but be bad for everybody in the long run. Printing 700 billion dollars in cash will be unbelievebly inflatonary. Prices will almost double over the next few years or less. The only real solution to this problem is to let it go. Our economy will re-value to some past value but it will be real and the economy will be able to again grow in a more reasonable fashion. It will be very painful as millions of people will lose ther jobs, homes, and everything else they own. But then the Goverment will have something to do. Feed and house those people.

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