Federal Reserved looks to dispel doom and gloom
Ah, it’s autumn. There’s a certain crispness to the air in the
morning, a deepening of late afternoon shadows and the first of the
walnuts falling from the trees in my front yard. I love autumn. To
me it means crisp apples and crunchy leaves and pulling the soup
pot out from the back of the kitchen cabinet where it has been
hibernating all summer.
Federal Reserved looks to dispel doom and gloom
Ah, it’s autumn. There’s a certain crispness to the air in the morning, a deepening of late afternoon shadows and the first of the walnuts falling from the trees in my front yard. I love autumn. To me it means crisp apples and crunchy leaves and pulling the soup pot out from the back of the kitchen cabinet where it has been hibernating all summer.
So it’s autumn and all is right with the world. Or maybe not. A survey was released on Sept. 20 by the Public Policy Institute of California (PPIC) which indicated that Mr. John Q. Public is upset, among other things, with housing woes: Declining prices, slowing sales and increasing foreclosures. Most people have their sense of financial well-being tied into the value of their homes, their largest single asset. This market is unsettling to them.
It’s even more unsettling to the home-building industry, down almost 30 percent since this time last year. Before you say, ‘Yes, but that doesn’t affect me!’ think about all the other industries affected by this. Lumber, window manufacturers, flooring contractors, paint stores, tile setters, landscapers, do-it-yourself emporiums, interior decorators, appliance manufacturers, alarm system installers, plumbers…the list goes on and on. And when these businesses are not booming, the owners and workers are not spending as many dollars for clothes and restaurants and entertainment.
But all is not doom and gloom. Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have indicated they are working to dispel the doom and gloom. First there was the aggressive lowering of the benchmark interest rate a half a point – most people were anticipating merely a quarter of a point adjustment. And there has been talk of allowing Fannie Mae and Freddie Mac to temporarily invest in jumbo loans.
So what does that mean in plain English? Loans are originated by lenders who package the loans and resell them to investors. In the aftermath of the subprime mortgage meltdown these investors have decided to put their dollars into safer arenas. Even people with really good credit ratings might have more difficulty obtaining a loan.
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that invest in what is termed a conforming loan, or one under $417,000. Obviously in our housing market $417,000 doesn’t go very far. But if they could buy a jumbo loan, one over $417,000, the tight lending conditions would be loosened a bit. The executives of these GSEs are definitely in favor of such a move.
However, Paulson and Bernanke are adamant that such a strategy would be temporary, if implemented at all, because they do not want the present system overburdened. Paulson particularly does not want the entities to hold the investments in their portfolios, but would be willing to have them resell the loans.
Many politicians, most notably Democrat Barney Frank of Massachusetts, wants the federal government to be more aggressive in its response to the situation. Bernanke, however, remains steadfast in his views. He does not want to see Fannie Mae and Freddie Mac mired in the cleaning up of the subprime mess. He also believes if this temporary measure is instituted at all, it should be done quickly. He feels the situation, left to itself, will resolve by about March or so.
But let’s back up a minute and look at what caused the problem in the first place. A subprime loan, by definition, is one that contains more inherent risk. If a home purchaser has good credit, they get a conventional loan. If the home purchaser has flawed credit, they are resigned to getting a subprime loan with a higher interest rate, theoretically to provide a higher return to the investor who is taking on more risk.
So the investors took the additional monetary return, but now that the risk has raised its ugly head they are all crying, “Foul!” There was a lot of greed which fueled this fire. First there was the greed of the consumer who wanted a house beyond what they could comfortably and reasonably afford. Then there was the greed of the lenders who wanted the higher return. And there were some mortgage brokers whose greed drove them to falsify their client’s financial picture to secure a loan, and therefore a commission. And there were some Realtors who talked people into marginalizing their financial well-being, again for a commission.
Whoa, doggies, there are lessons to be learned here for all of us. Dare to dream, but don’t allow your desires to outpace your resources. Second, make sure you have trusted advisors in your court. And lastly, people with a history of being unable to manage money should be very careful when borrowing large amounts of it at a higher rate than everyone else is paying.
I’m a firm believer there should be a course of study in high school dealing with money management. Balancing a checkbook, budgeting, the philosophy of living within one’s means and saving are becoming lost arts.
Okay, I’ll get off my soapbox now and go outside and enjoy the autumn day. Hope you do the same.
Be kind to your Realtor!
