Better Days Ahead

Hopefully this will be the last of my prose on the Credit Crunch. You all know that I have been upbeat throughout this historical economic shift and market correction. I know that it has been challenging for all in the real estate industry. The good news is that the markets are settling. While the throngs of Wall Street analyst decried Fed Chairman Bernanke for being to slow to add liquidity to the market and for letting the markets correct themselves, it turns out he and his Federal Reserve cohorts were wise in taking a deliberative approach to solving the problems created by the mortgage industry’s and investor’s insatiable appetite for mortgage backed investments.

In the last several weeks a few key events caused the correction to accelerate and then settle into a new calming pattern. In short they were;
Foreign governments and their central banks added hundreds of billions of dollars in liquidity to the market. Yes, that’s billions with a B! Of course, this did very little to help the situation and only served to devalue currencies and confirm to skittish investors that there must be a real problem.
The Federal Reserve adds some liquidity to the market. In the great scheme of things it wasn’t much. Barely more than fifty to sixty billion dollars were added to the market. This again did very little, but it did show that the Fed was going to move very deliberately to test what should be done in order to rectify the problem.
The so-called ‘market experts’ begin a cacophonous cry for the Federal Reserve to lower the Fed Funds rate.
Countrywide, the nation’s largest issuer of residential mortgages, fends off a story that it is ripe for bankruptcy. Adding to this fear, Countrywide taps ALL of an estimated $11.5 billion short-term line of credit to maintain liquidity
Bernanke one-ups the experts. In a very thoughtful and judicious move, the Fed Chairman lowers the Discount Window Rate from 6.25 to 5.75. This key financial instrument gives banks the ability to borrow money from the Federal Government on 30-day terms. Typically these loans must be collateralized by some sort of commercial property, commercial transaction or commercial loan pool. The Fed has never allowed these loans to be secured with residential mortgaged back securities or residential mortgage bond pools. But this time he allowed banks to come to the window and collateralize the loans with these pools. Furthermore, he allowed the banks to have unlimited renewals of the 30-day loans until the pools could be sold off at a reasonable market rate to repay the loans. This is essentially seen by the market as the U.S. Government saying that they have full faith in the investment instruments made up entirely of residential mortgages on American soil.
The final nail in the coffin for the Credit Crunch happened several days after the Discount Window Rate was lowered. Bank of America in a move that some experts say is on par with what J.P. Morgan did when he stemmed the Panic of 1907, went to the ‘Window’ borrowed $2 billion. They then turned around and invested that money in convertible, non-voting shares of Countrywide….the aforementioned troubled and largest purveyor of mortgages in these great United States.

The upshot of all this is that Bank of America’s action combined with a bold and well timed move from the Fed served to send notice to investors at home and abroad that the American financial system has the support and the confidence of our Federal government and one of the world’s largest banks. The next day the entire market began to settle and things have been calming on a daily basis. It appears from the number of underwriting approvals that we are seeing that things are beginning to relax somewhat. While we may never see the days of ‘free money’ again, I’m not sure that I will mourn that loss.

As we move forward I will continue to give you updates. At this juncture I see good old fashioned lending coming back into vogue. If your clients have some money and have proven that they have an ability to pay their bills one time and can save some money in the process, lenders will give them a loan. However, for those that don’t pay their bills on time….or ever, in some cases……then they can forget about finding anyone to take a risk and give them a loan. Borrower/Buyers must exhibit an ability, willingness and understanding of financial obligations through their credit report and the spending/saving habits or they will not be able to purchase a home. In these coming months don’t just focus on the Credit Score, but think about the catch phrase ‘Credit Worthiness’.

Stay tuned for more upbeat reports. I will begin to give you some guidance on who’s buying and why! Also, we’ll begin to discuss what Credit Worthiness means and how important it is to the lending process. As always, if you have any questions about the markets or the different loans available please don’t hesitate to call. We have survived this market correction and are growing stronger through our long-time partnerships! Thanks to everyone for your continued support and referrals.