What's up with the Economy?

In talking with a lot of people its become evident that the common folk, not entrenched everyday in the wonderful world of Real Estate, Mortgages and Wall Street, have a very limited understanding of how we got to where we are today. So before we attempt to tackle the economy from a political perspective, I think it is important to first lay the groundwork to how we got to where we are today, I might ramble a little because this issue directly affects my family and I everyday (as it does many of you) because of my line of work, so forgive me in advance.

The Housing Crisis, The Mortgage Mess, The Mortgage Meltdown, Mortgage Lenders Implode-o-Meter, Liquidity Crunch, Liquidity Crisis, Economy in Shambles, Dow Down 500 points, Wall Street Mess, Credit Crunch, Lehman Brothers bankrupt, Bear Stearns Bail out, AIG Bail out, Fannie Mae & Freddie Mac bail out, IndyMac Seized by FDIC, Countrywide Bought by B of A, Merryil Lynch bought by B of A, WaMu For Sale…I’m sure I’ve missed a few headlines, but you get the point. Things are messed up right now.

If you have turned on the news in the past 8 or 9 months you have probably noticed that there is something terribly wrong with the economy. If you’ve left the country recently and been amazed at the fact that 1 U.S. dollar can no longer buy you a steak dinner –you are probably scratching your head wondering what in the world happened. The answer to that question is pretty complicated and it took several things to happen to find ourselves where we are today. It all starts with housing.

I’ve been in the mortgage business for almost 3 years now and in that time I can tell you that things have changed dramatically. Until about 6 months ago, if you had a heartbeat, you could get a loan. No job? No problem! No Down payment?? That’s ok too; in fact we will finance your closing costs and your appliances along with that brand new home. I’m talking loans with 125% loan to value were available! That means if you were buying a house for $250,000 – you could get a loan $312,500—ask me how that makes sense?. These loans didn’t require you to provide documentation as to how much money you made or how much money you have. We would just take your word for it. I know I sound very sarcastic right now but it is all true. Stated Income, Stated Asset loans were very common industry wide- every lender did them. What about sub-prime loans, or as my manager affectionately calls them “Ax Murderer Loans”. Yes, if you were an Ax Murderer you too could probably be approved. A sub prime loan is a loan given to someone with less than “stellar” credit (Read: Horrible credit) at a higher rate than those with good credit. Excellent idea! If you are less qualified, we will make it harder for you to keep up with your payments.

Now I hope you see the obvious danger in what I just described, but to spell it out for you- it caused major damage. It has been one of the worst domino effects in the history of economics, and the extent of the damage is yet to be seen. Here's how it all went down:

Phase 1: Everyone who wants a loan gets a loan, everyone and their mom buys a house or two, including property flippers who would buy homes and literally flip them within a matter of days for a profit, supply falls, demand rises, which means property values become inflated. The economy enjoys a false state of euphoria and homeowners tap into their home’s equity to buy luxury yachts.

Phase 2: The majority of these loans get packaged and sold as “mortgage backed securities” to investment banks (think Bear Stearns, Lehman Bros, Morgan Stanley, etc). Investment banks have a huge appetite for these “highly profitable” securities and keep buying them, even encouraging lenders to actually LOOSEN their guidelines. More people do more risky loans, still no alarm bells going off anywhere...

Phase 3: Sub-prime loans begin to fail. People who got into these loans can’t keep up with their payments and begin to default and go into foreclosure. Some alarm bells sort of start going off. Lenders begin to pull back on sub-prime lending, but continue doing stated income/stated asset loans.

Phase 4: Investment banks begin feeling the pain of their failing mortgage backed securities and don’t have enough cash to keep buying them. As appetite for mortgage backed securities diminishes, mortgages finally become harder to obtain. Supply rises, demand falls, and home prices plummet, foreclosures reach record highs and housing is in shambles.

Phase 5: Investment banks can’t keep up with their bad debt and are not generating enough revenue to offset their lack of liquidity. Bad news for wall street- as these banks begin to fail, investors begin to pull money out of the financial sector and slowly we find ourselves in a down market across the board. The financial sector is also a huge employer and as these people begin to lose their jobs, they find other jobs that they are overqualified for, taking several employment opportunities off the table creating a spike in unemployment and only a small increase in wages across the board.

Of course there is more to the story than that but I’ve already written way too much and I doubt you have even made it this far…

Now comes the finger pointing… Shouldn’t the lenders be held accountable for such loose guidelines? How about the investment banks for creating a market for these loans? Uhh what about the genius who bought a 1.4 million dollar home with a stated income loan, working at the airport as a baggage handler? Probably should have seen foreclosure coming there, bud. Or how about Congress; instead of just chillin and doing nothing, why don’t you put some rules in place to make sure non of this happened?... I know…Bush! You’re the president dude couldn’t you have prevented this?

So whose fault is it? Coupled with rising energy prices, which makes everything more expensive, and the housing mess I just outlined, the recipe for the economy is complete disaster. In the following posts we will examine why we are in the situation we are in and why each candidate is better suited to improve the econonmy. Enjoy!