Randi's Blog

I just got back from traveling in Texas, Oklahoma, New Mexico, Arizona and California. I have traveled these states many times but the only thing different this time is we drove. We didn't just drive by ourselves but also with our rescued dogs CoCo and Rocky. Gary the cat stayed home. He is pretty self sufficient if someone gives him food and water. Well the reason we drove this time is to save some money. We usually board or pay someone to take care of the pets but we thought this time we will take a leisurely trip of three weeks and see some friends and relatives over the Thanksgiving Holidays. Our friends and relatives were real happy to see us coming. Well they said they were happy we came. Although their first question was when are you leaving? I guess I am a little off the point here. What I am trying to say is in this trip I had a lot of time to think. My husband and I hardly speak to each other so I had lots of time to think. It was surprising how many people and places have been affected by the economy. It is the holidays and there isn't very much joy out there. Not like in past years. It is a difficult time for most of us and everyone is feeling it to some degree. Looking back at my life I started thinking about economies I have lived through. I was born in the 1950's so I wasn't really aware of how the economy affected me until I was in my 20's. The first recognition is when my husband and I wanted to buy a house in 1970. I remember his wages were frozen and we didn't qualify. Interest rates for loans at the time were heading up. In 1971 we did buy a house with an FHA loan at 7%. Our wages were unfrozen just in time before the house was built and they let me use half of my income, because I was a woman, to qualify. I guess it was around 1973 we started hearing the words stagflation, OPEC, oil embargo. Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time according to Wikipedia. We had a 12% inflation rate and mortgage rates were climbing but wages were not increasing. Unemployment was close to 10% I believe. I don't know much about that because I don't have a degree in Economics. My degree is in Human Behavioral Sciences. During that time I remember waiting in lines to get gasoline, and going to the gas station by your license number on odd or even days. If the station ran out of gasoline before your turn you were out of luck. We waited in lines for hours! In the 1980's we bought our second house. We couldn't qualify but they had a nice assumable loan at the time that didn't require you to qualify. It was great because we could assume a 10% interest rate and take over their loan. If we had to get a new loan we would be paying 17% for an FHA loan or 20% for a Conforming loan. We had good equity from the sale of our other home, even if we did have to pull off a little creative financing for the buyer; the only couple that ever looked at the house. Talk about a slow market, it was neither a Buyers or Sellers Market. Ronald Regan was President and Paul Volker was Chairman of the Fed.

In 1982 I went to work for a large Mortgage Company. After a long period of high mortgage interest rates and a couple of years of very high interest rates the rates started to fall and caused a refinance boom. This is the beginning of my Real Estate and Mortgage career. I first went to work in the Collections Department, then Foreclosures, Payoffs, Secondary Marketing RTC, Loan Origination and finally Real Estate Sales and Loan Originations combined. There you have it 37 years of experience. We had some bumps in the roads along the way. Black Friday, October 1987 was the day of the largest single drop of the Dow Jones. The 1990's Savings and Loan Crisis that was the failure of over 700 thrifts and savings and loan associations. Our company was responsible to go to failed savings and loans and transfer the files back to our main office to be sold by the RTC to the mortgage backed securities of FMMA, FHLMC and GNMA. I was appointed to go the California savings and loans and thrifts to pull the files and re-pool them to sell. I really got a lot of experience here. Then of course there was 9ቧ 2001 the day our world and the economy stopped with it to allow us our grief for the over 3000 souls that went home that day. In 2001 I started a Mortgage Brokerage in a Real Estate Office. The real estate market was moving fast and there were homebuyers everywhere. I have always liked working with first time home buyers. I know how difficult it can be when you first start looking and I prided myself in showing them how to position themselves to buy a home if they had good credit and what to do if they didn't. You always have many clients that can't document all their income so we use what they call a Stated Income product. My entire career we still verified according the FNMA/FHLMC guidelines there is verifiable income even when we only state the income on the application. I guess it was around 2003 I started noticing that those guidelines were getting very lenient and not requiring much documentation. When my Processor told me about the guidelines I asked or Mortgage Representative why he didn't need the income documentation doesn't the investors want the verification? He said no because they are not being sold to investors but are being sold directly on the stock market. I almost couldn't breathe and I thought to myself, boy are we really in trouble NOW!!!! Like I said I don't know much about economics but I do know Mortgages. When a loan is made the Borrower gets the funds toward their purchase of refinance. Now the bank that is making that loan needs to get funds to replace what they just lent to the Borrower. So, the Bank takes all the like loans say 30 year term, same interest rate and pools them in group to be sold to what is called the Secondary Market. This is the investors that purchase the loans, FMNA, FHLMC, GNMA and various groups such as retirement funds, Insurance Companies, and Banks. Their money goes to your loan company so they can make more loans. Now because of the FNMA/FHLMC guidelines that are standard in the mortgage industry these mortgage backed s ecurities have an AAA rating on the stock market where they get sold. AAA is the only rating they have because of the pooling history of Fannie Mae and Freddie Mac. I am not going to mention any names but some brokerage companies figured out that they could make lots of money if the take these new Stated Loans and sell them directly on the market. Of course the only rating there is on a mortgage back security is AAA there has never been any other rating. What is different about the new Stated Income Loans is that they may or may not be pooled and they may or may not be credit worthy or have the income to repay the loan. The more loans pooled or sold in a group are less risk to the investor. If someone fails to make their payments then the other loans will help lessen the loss. With the new way an individual may buy the loan or someone in another country may buy it. If the Borrower defaults then the total loss will be on the investor. Because loans have gotten so easy everyone can get a loan. They start buying property because they see the house values increasing; they buy a house because now someone will give them a loan even if they don't have the income to pay for it. Everything is wonderful and everybody is happy. They are happy because we not only are giving out loans we are making a low interest rate so they can keep the house a few years and sell it at a huge profit whether as investment of buying up to our next home.

We have all lived the rest of this story in one way or another. The Brokerage Houses are doing great. They have more business than they can handle. It is now 2005 and prices are still high on homes and everyone is wondering 'how can it go on?'. Housing prices are going up but wages are not increasing. 2006 we are talking housing bubble. Instead of Buyers offering more than the asking price they are now offering less than the asking price or not competing at all. The low interest rate that most of them have been paying is due to change and their payments will be increasing. 2007 payments are going up and equity is going down. They can’t refinance because there is not enough equity for the loan programs available. 2008 the credit rating companies are now catching on that the Mortgage Back Securities are not rated correctly and are a higher risk than disclosed. The derivatives start to cancel each other out. ( I won't even go there but, a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring according to Wikipedia). October 2008 the "Great Recession" is here. Now everyone knows that the Greedy market and Brokerage Houses are collapsing. September 2008 Lehman Brother fails, after all the bigger they are the faster they fall. The domino effect begins not only in the United States but around the world. The Federal Government gives money to all the entities that caused the fall. Policy is tightened on lending so the bleeding begins. People are stuck with homes they can't afford and will soon lose them. Investor’s walk away from homes because they are no longer good investments. Prices on homes are plummeting and homeowners are asking their lenders to help with a modifications or some relief since they can't refinance. The housing industry has come to a standstill; all industries connected to it have stopped hiring and are now letting workers go. People are losing their jobs or can't count on having a job for long. Well you know the story so far. This is my version but I am sure we all have a story. The Great Recession and How We Got Here According the Me! I know this is the holiday season and I should be wishing you happy holidays and believe me I do. I just want those of you that are living this story to know that I know you are struggling and you are in my thoughts during this holiday season. May all your holiday wishes come true!