October 2, 2008

Mortgage, stock market effects on Almaden

By Eric Nelson
Special to the Times

Editor’s Note: This space typically is reserved for hard news, but with today’s financial and credit markets growing one day and falling the next, we thought this primer on what is happening might help ease some of the confusion.

“What goes up must come down…” —Sir Isaac Newton

If we didn’t know better, we would assume Mr. Newton was speaking about real estate and the volatile mortgage market. So, just what is happening and how does it affect us in Almaden Valley? With Fannie Mae, Freddie Mac and the investment banks needing a bailout, perhaps you wonder when your turn will come?

As a bit of background, Fannie Mae and Freddie Mac are the agencies that oversee the purchasing of mortgages and, in turn, these mortgages are sold as securities on Wall Street to investors. Investment banks such as Goldman Sachs, Merrill Lynch and Morgan Stanley are companies that converted these mortgages into investment vehicles that were highly profitable for several years until the real estate market peaked in 2006.

While riskier loans were being made, the fact that home values continued to rise allowed investors to sell if they got into financial trouble and still make a profit. When market values leveled and then began to drop, the house of cards fell quickly.

First, it was the sub-prime market that fell. Sub-prime mortgages are done for clients who do not have above-average qualifications, typically because of below-average credit or income.

Then, it was the speculators’ turn to take it on the chin, or stock value as it may be. With values dropping, many homeowners became over-encumbered and chose to walk away from their property when the equity was gone.

This began a wave of unprecedented foreclosure activity that resulted in the sinking of banks like Indy Mac and Washington Mutual. Most banks saw their stock value drop to dangerously low levels and became vulnerable to takeovers and mergers.

At some point, the news became so grim that the financial markets both in the U.S. and abroad reacted with dramatic drops in stock and cash positions. This has led to government intervention, first with the bailouts of Fannie and Freddie and then in a low-cost loan to AIG, a major insurer of mortgages.

Conforming loan limits were raised, and lending standards became stricter overnight. Loans that offered payment choices without covering all the interest due were eliminated, as were the no-income verification loans over $417,000.

Last week, President Bush proposed a $700 billion bailout for mortgages that are failing. The creation of another Resolution Trust Corporation was recommended to oversee the servicing and handling of the failing mortgages. This would appear to be the end of the road for government involvement due to the extreme cost of cleaning up this mess.

This is not the first time that we have seen banks over-commit themselves with risky loans. In 1989, many savings and loans paid the same price as today’s banks are, by losing liquidity, merging with another bank or leaving the business. It took three years for the savings and loan industry to recover, and this will likely be the same story now.

So, what does it all mean? Are there any opportunities with mortgages that could benefit you? Not surprisingly, Almaden Valley has mostly held its market value and mostly avoided the foreclosure bug. Loan delinquencies are far lower in our community and tend to open up more opportunity in the market place.

The financial market upheaval has led to interest rate fluctuations that have been mostly lower. The safe harbor loan of a 30-year fixed is back in vogue and many clients are seeing great flexibility in interest rates if they have good-quality qualifications.

Market values all over the county have dropped, meaning you can purchase much more today than you could two years ago. In Almaden, there are still many reasonably priced homes for sale.

What’s on the horizon? With the presidential election coming, there will be an impact on the market regardless of the winner. There will be considerable pressure on the new president to stabilize both the stock market and the real estate market.

Eric Nelson is a resident of Almaden Valley and the Broker/Owner of The Honte Group. He can be contacted at enelson@thehontegroup.com or (408) 457-6052.