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The State of the Economy. How did we get here?
Ladies and gentleman capitalism is broke as we know it. It can be fixed, however, with the right moves and legislation. Right now we need a lot of help and the sooner the better.
Creative Financing has pulled the world down. It was created inside the office of an investment house. The “no verification loans”, aka the “no doc loans” , aka the “subprime” loans were created, and they have pulled the world down, close to a world depression. Loans were given out like candy. Basically, at the end, if you breathed air, mortgage brokers & banks could find you financing. The bad loans were made, foreclosures have started at historic rates, and the sunami wave of delinquent loans hasn’t even come in yet. The banks don’t have any money to lend, so it doesn’t matter how low the rates go. The secondary market, which is a group of investors that buy up these loans from the banks, are not buying up these loans. Its too risky. So the banks don’t have any money to lend. I found this out almost 2 years ago, when I was selling houses and writing up contracts, and the banks were making up excuses not to make the loans. They simply had limited funds to lend, and would only make loans to their best customers. The banks have packaged these high risk loans with the good loans, and this has complicated the selling of the loans on the secondary market.
It all started with the credit scores being the most important criteria for financing. Those with bad credit scores could find a credit cleaning company to clean up their scores, and bang, you were in business. Many products came out. The entrepreneaurs, that didn’t show steady income, but had made money in chunks always had difficulty getting loans. So they came up with some products that would allow loans based on their credit scores and minimal verifications, such as verification of their bank accounts to show income made. Verifications of their license, office, and utilities, etc, also were used. Now this made some sense and allowed loans to be made, and the loan business took off.
Then the verifications became less and less important, so it eventually it came down to no verification of anything (no bank statements, license, utilities, commerce record, nothing), except a good credit score, which could be manufactured by a good credit cleaning company.
I have been in the real estate business since 1984, and a broker since 1986, and I have never seen anything as creative and stupid as this. In the eighties, the mortgage industry used the negative amortization loans with teaser rates. The economy was in disaray as well. Basically, back then the interest rates had skyrocketed to 17 1/2 %.
How did we function? They came up with products called negative amortization loans. The first year the rates were 7 1/2 %, the next year it was 9 1/2 %, the third year it was 11 1/2 %, then the fourth year it was 13 1/2 %, and the fifth year, if you made it that long, was 15 1/2 %, and it finally leveled off at 17 1/2 %, years #6-#30. The problem was this wasn’t a buydown. The first year, the money that was owed for interest, the difference between 7 1/2 % and 17 1/2 % was added on top of the loan. So by year 3 you owed more money than the property was worth. These loans served to spur the economy initially, but eventually had to be terminated because of all of the loan defaults. This period was called the “Savings and Loan Crisis of the eighties” .
The government came in and bought the foreclosures back from the banks and sold them at extremely low prices. This served to spur the economy, with private investors jumping in and buying these houses with the lure of profit created on these foreclosures. Our new president at the time, Ronald Reagan came in and reduced the interest rates to more manageable rates, and our economy became robust again.
Our problems now dwarf the problems of the saving and loans crisis of the 80s. The wave of foreclosures are touching every segment of society, the rich, poor, middle class. The sunami hasn’t even rolled in yet. If you go to Realty Trac, Foreclosure to go, or any other foreclosure site you will be shocked and amazed at all of the foreclosures coming in. I know from being in the real estate business and talking to my clients, people plan to let their houses go. This will create a huge supply of homes on the market, and the values will dip even further. Not to mention the psychology and despair of losing your home.
I have come up with a solution for our crisis, or at least a few ideas. And I welcome your response and criticism. I don’t know how this will come about, but I know it has to come about, for the survival our capitalistic society. We need money for investment to live. I say raise the interest rates, but make money available again. Not a huge increase, just enough to make the investors want to buy up these loans again.
My 3 initial steps for fixing our economy is:
Number one, we need money in circulation. Of course, we need money so we can can buy products and services and live, but we need money in circulation for new investments, which is key to a healthy and growing economy. Money supply, not just printed money, but money backed by government securities. The government needs to loan the banks money to make available for loans again, and recirculation of the money is crucial. Raising interest rates will give investors higher yields and interest to invest in these bonds/securities.
The first bailout, money given to the banks, never made it out into circulation. The banks used this money to pay off their bills and line the pockets of their investors. This second bailout has to be for loaning money and putting money back into circulation.
I don’t think money given directly to our citizens will work. This will serve to deepen our problems. This is a quick fix, and ultimately fixes nothing. We have to get the system working again.
Number 2, a devaluation of current delinquent loans should be made to current market value supported by at least two appraisals. So if you owe 200,000 on a delinquent loan, and its worth 140,000, a new loan should be made of 140,000. The difference of 60,000 will be paid by the government to the lender. This will serve to keep the people in the houses, and to keep them up, and make payments. We need to do this because of the volume of foreclosures coming in, which will doom our society and economy.
These loans made should only be made to people who can show an ability to repay. Certain criteria must be set up for these loans. They must show they had loss of income, or some criteria to stop an all out refinancing of all loans.
Number 3 is job creation. Jobs should be created by the government such as new work on highways, bridges, and inner core infrastructure of our cities. However, infrastructure should be a new creative innovative urban design for transportation and public facilties. Innovative designs using electric transports run by clean power, not fossile fuels should be used.
Also, new business loans should be made to those that show an inclination towards energy savings and innovation.
So to recap, I think we need to
1. Make money available for loans (money back in circulation).
2. Number two, have a form of devaluation to keep the people in their houses with renewed interest
3. Job creation.
This entry was posted on Sunday, January 4th, 2009 at 4:27 pm and is filed under Our Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Edit this entry.
One Response to “State of our Economy”
DELIRIOUSTAMPA Says:
September 3rd, 2009 at 5:20 am edit
Great comments. How is it that you know these great simple things and our government does not?
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