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One of the greatest blunders of our time is made by those who blindly assume home prices are so low they couldn’t possibly go any lower.

In reality, home prices don’t stop going down at some particular level that appears to be “cheap.” Nor do they stop falling because they match some historical price that was previously a low.

The end of the decline in home prices will come only when there are no new economic forces driving them down.

When will that be? I’d love to say it’s just around the corner. But everything I see tells me that, despite the sharp declines already recorded, a steeper plunge in home values is dead ahead.

The reason: So far, most of the troubles in the housing market have been caused by bad mortgages going sour. Meanwhile,

  • the more common causes of housing slumps — high interest rates, rising unemployment, and recession — are just starting to kick in. And …

  • the most powerful causes — depression and deflation — are still on the horizon.
In the 1920s, my father (left) and uncles never dreamed of borrowing to buy a home. Home mortgages were rare.
In the 1920s, most people never dreamed of borrowing to buy a home. Home mortgages were rare.

In the boom leading up to the Great Depression of the 1930s, most Americans did not borrow money to buy a home. Variable rate mortgages didn’t exist. And Wall Street investors rarely got involved in the business of financing homes. Home prices did fall dramatically. But those price declines came mostly after the stock market crashed, after the economy shrunk and after millions of workers had lost their jobs.

The crux of the problem today: That phase of the housing crisis still lies ahead. Moreover, this time, because of massive debts, the pressure to abandon or sell homes is far greater.

Conclusion: If the U.S. sinks into a depression, home price declines could be as deep as, or deeper than, those of the Great Depression, especially in the hardest hit regions of the country.

It is a frightening thought. Yet, on the positive side, a sharply reduced price for the average home is the only fundamental, enduring mechanism for making homes more affordable and restoring demand — especially if the days of easy credit are gone.

Already, in 2008, one in ten American homeowners has defaulted on their mortgage or lost their home in foreclosure. Nearly four in ten owe more than their home is worth.

And all this is before the recession deepens and before we experience the next phase of the Great American Housing Nightmare.

Why This Was One of the Biggest
Speculative Manias of All Time

The Great American Housing Nightmare has no precedent; no historical roadmap to guide you, no proven pathway to follow.

No one can tell you with precision how far U.S. home prices will decline, when they will hit bottom, how many homeowners will lose their homes, or how soon a real recovery will begin. Getting to a recovery could take many years.

In fact, to throw some light on the speculative frenzy and panic that have swept through the U.S. housing market, the most relevant precedents I could find have nothing to do with homes at all. They are the Dutch speculative mania of the 1630s, the South Sea Bubble of the 1700s and the stock market panics of the early 1900s.

In those boom-and-bust episodes, the objects of speculation were tulips, slaves and stocks. This time, it was the American home. But despite that key difference, the critical boom-bust elements that helped create the speculation — and the depth of the losses which ensued — were roughly similar.

Boom-Bust Element #1: Debt

Debt is the fuel of speculation. Without it, speculative bubbles cannot emerge. With it, prices can be inflated beyond the wildest imagination.

In seventeenth century Holland, investors speculated wildly on tulips, putting up as little as 2.5% of their own cash. Similarly, in early 20th century stock market booms, investors put up as little as 10% of their own money, using borrowed funds for up to 90% of their purchases.

But in many respects, the borrowing mania that created the Great American Housing Nightmare makes all previous debt manias pale by comparison.

By mid-year 2008, the Federal Reserve reported a grand total of $14.8 trillion in U.S. mortgages outstanding — 40% more than the entire national debt and triple the total of all the mortgages in America just a dozen years earlier.

Sadly, it was not just the overwhelming quantity of debt that was so dangerous. Even more dangerous was the substandard quality of the debt. Consider the facts:

Bullet In all prior speculative bubbles in history, investors were required to put up at least some of their own money to buy into the boom. Even in the tech stock mania of the early 2000s, investors had to put up a minimum of 50% cash for their stock purchases.

But in the frenzy that preceded the Great American Housing Nightmare, millions of Americans bought homes with zero money down!

Lenders didn’t merely look the other way while home owners borrowed the down payment; they actively encouraged it. Homebuyers without enough cash to buy a $500 TV set were declared the proud new owners of $500,000 luxury homes. Many took it one step further with serial purchases of homes, leapfrogging with glee from one free ride to the next.

Bullet In all prior speculative bubbles, borrowers were invariably required to make payments of interest and principal in full and without fail, with zero tolerance for any other arrangement.

In contrast, during the Great American Housing Nightmare, millions of homeowners were allowed to pay interest only or even less than full interest.

So it should come as no surprise that the majority opted to make the smallest payments allowed, while the lender added the unpaid amounts to the loan balance. As with credit cards, the more that time went by, the deeper into debt the borrowers fell.

Bullet In prior historical episodes of rampant speculation, loans were almost invariably held by the lenders, who, in turn, had a vested interest in making sure the borrower’s finances were sound and their payments were kept current.

But in the Great American Housing Nightmare, the mortgages were mostly held by non-lenders — institutions and investors that were far removed from the borrowers.

Bullet In earlier manias, investors speculating with borrowed funds were required to document that they were worthy of the loans. They invariably had to present hard evidence of income, proof of assets, or both.

But in the Great American Housing Nightmare, even that was not the case. Millions were allowed to borrow huge sums without a scintilla of proof that they had the wherewithal to make the payments.

Bullet In earlier manias, the bubble was generally confined primarily to one debt sector.

Not this time around! Beyond the $14.8 trillion in residential and commercial mortgages in America, there are another $20.4 trillion in consumer and corporate debts. This meant that mortgages represent only 42% of the private-sector debt problem in the country.

Result: Americans are not only under tremendous pressure to sell their homes due to burdensome mortgages, they are also squeezed by huge credit card balances and by layoffs from employers equally addicted to debt.

By virtually every measure, the debts piled up prior to the Great American Housing Nightmare are far bigger and worse than any debt pile-up ever witnessed in history.

Boom-Bust Element #2: Investor Frenzy

Gouda Tulip Bulbs
South Sea Co. Shares

In 1637, at the height of the tulip mania, just one Semper Augustus bulb changed hands for 12 acres of land. Another bulb was sold for a massive collection of goods, including 160 bushels of wheat, 160 bushels of rye, four oxen, twelve swine, two hogsheds of wine, four casks of beer, two tons of butter, 1,000 pounds of cheese and more. But just a few months later, similar bulbs were practically worthless.

In 1720, investors drove up shares in the South Sea Company from 125 to 960 in six months and back down again to 180 in less than three months.

In 1929, the Dow Jones Industrials surged from 213 in 1928 to 381 in 1929, only fall to 41 in 1932.

In each case, millions of investors and speculators — most with little experience in the market — were caught up in a wild buying frenzy, only to dump nearly everything in an even wilder selling panic.

Unfortunately, we witnessed a similar pattern prior to the Great American Housing Nightmare. As the buying frenzy heated up, homes and condos were flipped faster than hotcakes. Prices were driven through the roof. And even mortgages themselves were transformed into securities that were riskier than some of the riskiest stocks in the world.

At the peak of the housing bubble, the average price of existing home reached nearly five times the total yearly income of its owners, the highest in history. At the same time, the affordability of each home plunged to its lowest level in history.

Once set in motion, the speculative fever spread quickly. From Miami to Phoenix to San Diego to Las Vegas, investors camped outside housing developments to snap up three, four, five, or more units at a time. Condominium developers built gleaming towers in major cities, based almost exclusively on anticipated bids from investors and speculators and with no evidence of real underlying demand. From coast to coast, investors signed on to millions of pre-construction contracts, only to flip them before the first shovels touched the ground.

This kind of speculation was traditionally just a small niche in the giant U.S. housing market. But at the peak of the housing boom, it nearly took over: An astounding 40% of houses and condos were bought as second homes or investments. The yearly rate of appreciation on existing homes catapulted from 3.6% in January 2001 to 16.6% in November 2005. On new homes, meanwhile, it surged from 4.8% in to 18.1%.

Fueling the bubble, government agencies like Ginnie Mae, government-sponsored enterprises like Fannie Mae and Freddie Mac, and private investment banks bundled up mortgages and resold them as securities that could be traded much like stocks and bonds. These securities, in turn, were bought by banks and investors in the U.S., Europe and Asia. The total amount of mortgages transformed into these securities: $4.8 trillion, 60% more than the total value of all the stocks in the Dow Jones Industrial Average.

In just one year — 2006 — $2.4 trillion in new mortgage-backed securities were created, more than triple the amount of just six years prior. Even in past investment manias, there was no such structure. Even the wild and wooly speculators of the 1600s, 1700s and the early 1900s did not take the madness to that extreme.

Boom-Bust Element #3:
Government-Created Monopolies,
Corruption, Fraud and Cover-Ups

Some of the largest speculative bubbles of all time were born out of government-sponsored monopolies, nurtured by government-bred bureaucrats and kept alive beyond their time by government-inspired corruption, fraud and cover-ups.

In the South Sea Bubble of 1711, the English government needed to find a way to fund the huge debts it had incurred in the War of Spanish Succession. So the Lord Treasurer, Robert Harley, created the South Sea Trading company to help finance the government’s debts. The company got exclusive trading rights in the South Atlantic plus a perpetual government annuity of over a half million pounds per year. In exchange, its investors agreed to assume responsibility for about £10 million of the government’s debt.

It seemed like a win-win. But the government’s sponsorship and the company’s monopoly led to big trouble. The company’s managers, thinking they had the government’s largesse to fall back on, were complacent and ignored signs of economic troubles. They took excessive risk. And ultimately, investigations turned up massive fraud at the company and pervasive corruption in the government.

When the entire structure collapsed, there was nothing the government could do except to pass what later become known as the “Bubble Act” aimed to prevent a future recurrence.

Similarly, in the early 1900s, the Panic of 1901 occurred in the wake of a failed attempt to create a massive railroad monopoly; the Panic of 1907 followed a failed attempt to corner the copper market; and the Crash of 1929 resulted, to a large degree, from collusion among brokers, bankers and tycoons.

In nearly every case, the government gave select companies or individuals special privileges, waived critical regulations and encouraged great concentration of power. And in nearly every case, the government made desperate attempts to salvage the boom long after the bust began. But it was ultimately powerless to avert a collapse in the very structures it had helped to create.

Unfortunately, the same, or worse, could happen in the Great American Housing Bubble: The U.S. government created two monopolies that made England’s eighteenth century South Sea Company and America’s twentieth century industrial monopolies look small by comparison. Their names: Fannie Mae and Freddie Mac.

The U.S. Government gave these companies monopolistic control over America’s largest debt market — mortgages. And then, beginning in the early 2000s, the government spurred these monopolies to compete aggressively with private subprime lenders.

Not surprisingly, the results were similar to those of earlier bubbles: Extreme complacency, excessive risk-taking, and, ultimately, fraud.

In September 2004, the Office of Federal Housing Enterprise (OFHE), Fannie’s and Freddie’s primary regulator, issued a special report revealing massive accounting irregularities. And four years later, in September 2008, the companies had still not cleaned up their act, prompting the Securities and Exchange Commission to launch new investigations into accounting deceptions.

The biggest deception of all: In their official filings and public pronouncements this year, Fannie and Freddie consistently and wildly overstated their capital, while understating their risk. Supposedly built with mortar and steel, Fannie and Freddie were actually houses of cards in disguise.

Repeatedly, the company executives swore on oath that they had more than enough capital. And even on the eve of their demise, their regulators testified before Congress that the companies were solvent.

Based on their smoke-and-mirrors accounting, perhaps. But based on the basic rules that you and I must abide by, not even close. For longer than anyone cared to admit, Fannie and Freddie had been insolvent. Meanwhile, their chief executives hid behind carefully camouflaged facade, marched into riskier corners of the mortgage market, and trashed the trust of millions of Americans with no sign of restraint and little expression of regret.

Between 2005 and 2008, for example, Fannie Mae purchased or guaranteed at least $270 billion in subprime mortgages — high-fee loans to high-risk borrowers. That was more than three times as much as it had bought in all its earlier years combined.

Yet no one seemed to bat an eyelash.

Quite the contrary, Wall Street and Washington cheered loudly, encouraging them to take on even more risk.

Why such enthusiasm? Because the rapid growth in fees supercharged Fannie’s stock price. Because big revenues meant huge bonuses for executives — $90 million for one, $30.8 million for another, and $10 million for a third. And because the easy money flowing to unqualified borrowers indirectly helped politicians buy millions of votes.

Suddenly, however, in September 2008, it was finally recognized that all the financial statements and all the sworn testimony about solvency were unabashed lies. Suddenly, the two largest mortgage lenders on earth, supposedly rich and prosperous, were thoroughly bankrupt. And suddenly, underscoring the depth of their demise, each company needed an unprecedented $100 billion injection of government funds just to keep it alive.

The potential bill to taxpayers: $200 billion. But that figure assumes an end to the credit crunch, no more debt collapses, no recession, and certainly no depression. If any of these assumptions should prove wrong, $200 billion will barely cover what is fast becoming history’s largest cesspool of sinking debts and commitments — $5.2 trillion in mortgages guaranteed or owned by the two companies, their $1.5 trillion in debts, and their $2 trillion in derivatives.

Boom-Bust Element #4: Collapse!

How much could home prices ultimately decline in the Great American Housing Nightmare? We have no way of knowing with certainty. But we can draw some lessons from similar bubbles and crashes throughout history:

  • In the Dutch Tulip Mania, investors lost nearly all of their money if they bought for cash; more than all of their money if they bought on the slim margin of just 2.5%.

  • In the South Sea Bubble, the cost of the shares investors bought fell from a peak of 1,000 to less than 100, a loss of 90% or more.

  • In the Crash of 1929 and the ensuing 3-year bear market, investors lost 89% of their money even in America’s largest industrial stocks.

  • In the tech wreck of 2000-2002, when a myriad of Internet and technology companies collapsed, investors lost 78% of their money invested in the average Nasdaq stock; and 100% in companies that went under.

  • In Japan’s long bear market, which stretches from 1990 to the present, investors have lost 82% of their money from peak to trough in companies that make up the Nikkei average, and much more in smaller companies.

  • And in the financial crisis of 2008, investors lost 99% or more of their money in some of America’s most respected financial institutions.

My argument: The speculative bubble in U.S. homes is as extreme as each of these historic examples; and in the most hard-hit regions, the resulting price collapse could be equally extreme. Indeed, the Great American Housing Nightmare is progressing in three phases:

Phase 1. The bust in the subprime mortgage market. This is now history.

Phase 2. A severe U.S. recession. As of this writing, this phase is just beginning.

Phase 3. Depression and deflation. Still ahead.

Therefore, no matter how far home prices in your area have already fallen and no matter how cheap they may appear, they could still fall a lot further.

In the hardest hit regions, an individual home that was once priced for $400,000 at its peak could fall to as low as $200,000 by the end of Phase 1. But don’t blindly assume that’s the bottom. In Phase 2, it could fall in half again, to $100,000. And in Phase 3, it could fall by at least half for a third time, to as low as $50,000 or $40,000.

Homes with peak prices of $1 million could sell for as little as $100,000; some, originally priced for $10 million may have no buyers at all — even with asking prices as low as $1 million.

Nationwide, the median home price will not fall nearly that far. But that factoid alone will do nothing for homeowners in bubble areas like Florida, Nevada or California. Nor will it help those in blighted regions where factories are closed and unemployment rises far above the national average.

Never before in history have we witnessed home price declines of this magnitude! But that fact alone does not make them implausible, let alone impossible.

Remember: Never before in history has so much debt, speculation, government manipulation, fraud, corruption and consumer abuse been heaped onto any housing market! And if there’s one thing that history teaches us, it’s that unprecedented causes lead to unprecedented consequences.

Lessons To Learn Now Before It’s Too Late

Lesson #1. Don’t blame yourself. Virtually every realtor and expert in America told you that investing in homes was a “sure bet”; and any lender in the country that accepted your loan application was, in effect, telling you that you had the means to make the payments.

Lesson #2. Don’t look back. Forget what your property was worth at its peak. And try to forget what you paid for it as well. That’s water under the bridge. Instead, look at what’s happening today — in the headlines, in your neighborhood, at companies in your area.

Lesson #3. Don’t count on the government to save the day. There are bound to be a series of public programs to help some people some of the time. But they will be spotty; they won’t turn the housing market around; and you may not qualify. For example, the FHASecure program rolled out in late 2007 essentially created three classes of homeowners with mortgages:

  • Homeowners current on their mortgages and not at risk of foreclosure were mostly not eligible for federal assistance;

  • Those already in foreclosure were also not eligible; and …

  • Ironically, only home owners falling behind in their mortgage payments could get government help.

Not only did that make it very difficult for most people to qualify, but it also gave a strong incentive to households to deliberately fall behind on their mortgages. People asked: Why should I cut my food budget or give up on my nights out when my neighbor is having all the fun, skipping his mortgage payments and getting rewarded by the government for his imprudent behavior?”

Ultimately, these kinds of government programs are fundamentally flawed and doomed to fail.

The most important lesson of all: Don’t underestimate the potential depth, speed and duration of the decline. As the debts are unraveled, the economy comes unglued and the deceptions are uncovered, home prices could continue to plunge much further.

If you are able and willing to sell your properties, do so now. Don’t wait.

Good luck and God bless!

 

Bridges to Hope Foundation Newsletter and Blog

www.BTHF.org

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The government is throwing everything … and I do mean EVERYTHING … at the credit and mortgage markets.

It has taken over Fannie Mae and Freddie Mac.

It has agreed to buy Mortgage Backed Securities (MBS) in the open market.

It has pledged to take hundreds of billions of dollars in crummy assets from the nation’s major financial firms.

And it has promised to infuse the banking system with as much as $250 billion in capital.

The primary goal of all these bailout efforts: To lower the financing costs associated with home purchases.

But the result of all these efforts is that mortgage rates are going up.

Yes, I said UP. Let me explain …

Bond Investors Are Asking:
“What Price, Bailouts?”

The 30-year fixed mortgage is America’s bread and butter loan. Long before the industry thought up new and creative ways for borrowers to bury themselves in horrid loans, it’s what home buyers typically used to purchase a home. And it’s what I believe both borrowers and lenders are returning to because of the safety and stability that a long-term, fixed rate mortgage provides.

But rates on 30-year fixed loans aren’t going down. They’re going up.

The average 30-year rate jumped to 6.47% in the week of October 10, according to the Mortgage Bankers Association. That was up from 5.98% a week earlier and just shy of the August high (6.58%), itself the highest in more than a year.

How can rates be going up when the economy is tanking and the government is throwing everything it can at the banking sector and credit markets?

Washington's best efforts have not been enough to prop up the housing market or keep mortgage rates low.
Washington’s best efforts have not been enough to prop up the housing market or keep mortgage rates low.

Because bond investors are dumping the heck out of bonds — and when bond PRICES fall, bond YIELDS (interest rates) rise.

Why are investors selling bonds? Well, we just learned that the budget deficit soared to $454.8 billion in fiscal 2008, which ended September 30. That was more than double the $161.5 billion deficit in 2007 and the highest in the history of the country.

Thanks to all the fresh bailout programs, the deficit will likely surge by a few hundred billion MORE dollars in fiscal 2009 — and it could easily top $1 TRILLION.

But no one in Washington has shown any willingness to raise taxes to pay for all of these bailout programs. And it’s not like there’s a pile of money just sitting around in the U.S. Treasury to fund them, either.

We’re a net debtor nation, and we’re going to have to borrow hundreds of billions of dollars to make good on all of our promises.

That means a flood of Treasury debt the likes of which we’ve never seen is going to wash over the market in the coming year or two.

Bond traders know that will overwhelm bond demand. So they’re not sticking around. They’re selling the heck out of bonds NOW, driving prices down and rates up.

Long bond futures plunged from an intraday high of 124 23/32 in mid-September to around 114 now — a decline of more than ten points in price.

Since bond yields move in the opposite direction of prices, they’re going up. The benchmark 10-year Treasury Note now yields about 4%, up from the 3.4% area in September.

Look, politicians and policymakers would like you to think they can just wave a magic wand, drive mortgage rates down, save the banking sector, and return us to the happy-go-lucky, reckless lending days of 2003-2007.

But they can’t. The bond market is pushing back and saying loud and clear: “There is no such thing as a free lunch.”

My bottom line message hasn’t changed, either. I continue to expect any recovery in the housing and credit markets to take a long time. And I continue to believe that while all of these government bailout programs can treat some of the downturn’s symptoms, they can’t cure the underlying disease. The only real cures are time and price changes.

Bridges to Hope Foundation Newsletter and Blog

www.BTHF.org

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Monday: 09/08/08 5

Treasuries were all over the place today as the news of the Fannie and Freddie takeover scared off traders. But the changed dynamics in the mortgage backed securities market spurred a heavy round of hedging activity that involved the purchase of Treasuries. 

As a result, Treasuries recovered from their losses to finish with modest gains at the long end of the market. Stocks soared on the takeover news and, despite some choppy action, two of the three major indices retained strong gains while the third posted a mild increase.In late trading, the 10-Year Treasury Note was up by 6/32, lowering its yield by 3 basis points to 3.67%; the Dow was up by 290.43 points to 11,510.74; and the Nasdaq was up by 13.88 points to 2,269.76.

The government seizure of the two giant mortgage agencies heartened stock traders who see it as restoring some confidence in the credit market. Of course, a big beneficiary was the financial sector though shares of both Freddie and Fannie fell today. The sector shift diminished some of the luster of tech stocks and they lagged in performance.

Oil futures also gyrated today but the price of a barrel of crude for next month delivery eventually closed with a nominal gain of $0.11 to settle at $106.34. The price had fallen in each of the previous six sessions for a total of $11.92 and the drop was attributed to projections of lower future demand for the commodity as the world economy cools.

Today’s pause is being attributed to uncertainties about tomorrow’s policy meeting of the Organization of Petroleum Exporting Countries (OPEC). A couple of storms are also threatening to disrupt production facilities in the Gulf of Mexico this week.

By the end of stock trading, the Dow had gained 2.58% and the S&P 500 was up by 2.05% while the tech-heavy Nasdaq gained only 0.62%. The movements should be taken in context, however. While the Dow has gained 2.88% in the last two sessions, it fell by 2.99% last Thursday. The S&P 500 rose by 2.50% in the last two sessions but it also fell by 2.99% on Thursday. The Nasdaq has not performed as well; today’s increase was the first following six session losses totaling 6.46%.

In the bond market, today’s gain for the benchmark 10-Year Note was not enough to make up for Friday’s loss but the yield closed today at its second lowest level since April 15 (yield moves inversely to price).

Tomorrow brings the report on pending home sales and the report on wholesale inventories — both for July. After a general decline in the last two-and-a-half years, the sales index perked up in April and June as falling home prices have begun to attract buyers.

But progress in the housing sector is still being blocked by tighter credit conditions, higher mortgage rates, and an aversion to borrow money to buy an asset that is declining in value. For July’s pending sales index, a decline of between 1.0% and 1.5% is predicted.

The growth of wholesale inventories has been relatively strong this year (with the exception of just slight growth in March). Moreover, outflows have also been strong, keeping inventory levels exceptionally lean. In June, the seasonally adjusted level of inventories rose by 1.1% and the sales level rose by 2.8%. This left the inventory-to-sales (I/S) ratio at a record low 1.06. This meant that at June’s sales pace, without any additions to stocks on hand, inventories would be entirely depleted in a little over one month.

For July, inventories are expected to have increased by 0.7% and the I/S ratio will remain low.

Tuesday’s releases are not considered high-impact indicators and trade is expected to remain volatile in the markets as participants continue to sort out the implications of the mortgage agency changes.

10:30 AM EDT : Treasuries began the day deep in the red in response to Sunday’s news of the federal takeover of secondary mortgage giants Fannie Mae and Freddie Mac. The move undercuts the value of Treasuries by removing their safety advantage now that mortgage debt is also essentially government-backed. Treasuries are also hurt by the increase in supply that may be needed to finance the capital support for the mortgage agencies.

The news has also eased concerns about the health of the credit market in general and this has spurred a strong rally in stocks this morning. The rise in stocks makes bonds less attractive by comparison.

But Treasuries have pared much of their earlier losses though this may just be due to technical factors; for instance, a bounce may have triggered a round of short-covering that snowballed and/or traders who may have been sidelined during the Labor Day holiday period may be adjusting their positions.

In any case, the major influences appear to be aligned against bonds and price action may be volatile again today. The benchmark 10-Year Note had been down by as much as a point (32/32) but was recently trading down by just 10/32.

Freddie Mac, originally named the Federal Home Loan Mortgage Corporation, and Fannie Mae, originally the Federal National Mortgage Association, were hybrid companies, established by the government but run as private corporations known as government sponsored enterprises (GSEs).

The agencies purchase loans from approved lending institutions, create mortgage backed securities, and sell the securities in the financial market. Servicing of the loans is handled by the primary lending institutions or servicing companies. A portion of the securities are held by the agencies themselves. They also issue their own corporate bonds as well as issue stock to raise capital.

In the last couple of years, the collapse of the securities sector backed by high-risk mortgages has weakened the companies and clouded confidence in their ability to continue functioning effectively. The worries have persisted despite the agencies’ credit lines with the Treasury and other sources of capital including the Federal Reserve’s discount window. The situation ultimately led to yesterday’s announcement by Treasury Secretary Henry Paulson that the companies had been taken over and are now under the operational control of the Federal Housing Finance Agency (FHFA).

The takeover is the focus for the markets as there are no major economic releases scheduled. Tomorrow, a minor indicator on the housing sector and a second-tier inventory report will be released. The housing release is the report on pending home sales for July. In June’s report, the National Association of Realtors said that its seasonally adjusted index of pending sales rose by 5.3%. Though the jump surprised observers who were expecting a decline, the index (unadjusted) was down by 12.1% from June of last year.

The pending sales information is somewhat dated and its significance is diluted by the fact that the index is just an indicator of upcoming actual sales. The data was first published in 2005 with data going back to 2001. The index is a measure of the seasonally adjusted, annualized rate of contract activity in a month. The NAR asserts that 80% of contracts become sales within two months and a large portion of the rest become sales two months thereafter.

For July, the index is expected to have declined by 1.0%.

The other release of the day is the report on wholesale inventories for July. This data is also somewhat dated and it only provides one piece of the overall inventory picture. The more comprehensive, business inventories report will be released at the end of the week.

In the report for June, the Commerce Department said that the seasonally adjusted level of wholesale inventories rose by 1.1%, almost twice as large an increase as analysts had predicted. The level rose by 0.9% in May. Rising inventory levels are bullish if they are perceived as anticipating demand instead of reflecting a back-up due to falling demand. June’s increase reflected rising demand as the sales level increased by 2.8%, the largest jump in over four years.

The combination pushed the inventory-to-sales (I/S) ratio down to a record low 1.06 from May’s previous record low of 1.08. The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. Low turnover times mean there is high pressure to replace supplies and it is, therefore, a positive economic indicator.

A smaller inventory increase of about 0.7% is predicted for July, which, if accurate, would be the smallest rise in four months. The I/S ratio may edge higher but it will still indicate extremely lean inventory levels.

There are no major releases scheduled for Wednesday so a couple of minor releases may get added attention. These are the weekly oil inventory report from the Energy Department and the report on mortgage application activity from the Mortgage Bankers Association of America.

On Thursday, the employment situation will be reviewed once again in the jobless claims report. In last Thursday’s report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits rose the week before by 15,000 to 444,000. This followed three weeks of declines totaling 28,000 but this in turn followed four weeks of increases totaling 109,000. The latest reading was the third highest since early 2003.

The four-week moving average fell by 3,250 to 438,000 but this was still the fourth highest reading since early in 2003. For the first thirty-five weeks of the year, the average weekly, initial claims reading has been 377,514. For the same period last year, the average was 316,000.

The report said that continuing claims in the week of August 23 (continuing claims must be at least a week old) rose by 6,000 to 3.435 million. The four-week moving average rose by 33,250 to 3,400,250. Both levels were the highest since November of 2003. For the first thirty-three weeks of the year, the average weekly, continuing claims reading has been 3,020,647. For the same period last year, the average was 2,521,618.

Thursday also brings a couple of trade related releases. The first is the report on international trade for July. June’s report was more bullish than expected. The Commerce Department reported that the seasonally adjusted value of imports exceed that of exports that month by $56.8 billion. The deficit figure was 4.1% smaller than May’s revised $59.2 billion and was a much smaller gap than the $61.5 billion that forecasters had predicted.

Higher oil prices helped boost imports by 1.8% to a new record high, but exports rose by 4.0% — also to a new record high. The decline of the dollar over the last six years has made U.S. goods cheaper abroad, thus spurring increased foreign buying.

Net exports are a component of gross domestic product and the smaller subtraction to the GDP calculation contributed to an upward revision in last week’s preliminary report on the second quarter. The advance report had said that GDP grew at a 1.9% rate but this was revised to 3.3%. A final report will be released on the 26th of this month.

July’s trade figures will provide the first look at situation for the third quarter. Forecasters are looking for a wider gap of $58.0 billion, but the bearish aspect may be blunted somewhat by expectations of a smaller deficit in August due to a sharp decline in oil prices.

The other trade related news on Thursday will come in the report on import and export prices for last month. In July’s report, the Labor Department said its index of import prices rose by 1.7%. This was the smallest increase since February but it was still strong by historical standards and it topped analyst predictions. In addition, June’s originally reported increase of 2.6% was revised up to 2.9%.

Of course, a major contributor to the increase was a 4.0% rise in the price index for petroleum products (oil). Though this was also the smallest increase in five months, it was still strong, and excluding the category, prices were still up by 0.9%, matching the increase in June when the index for petroleum products rose by 8.9%.

On a year-over-year basis, the import price index was up by 21.6% in July. It was the highest Y/Y margin going back to at least 1989 (available data before that time is quarterly). The petroleum index was up by 79.2% on a year-over-year basis, down from June’s 82.6% margin but the second highest in the history of the available data series. Excluding the category, the price index was up by 8.0%, the highest Y/Y margin in the data series.

Export prices also saw large gains. The overall price index rose in July by 1.4%, the largest jump in four months and the twenty-first consecutive monthly increase. The volatile agricultural product category saw an increase of 6.7%, the largest monthly jump in the available history of the data series. Excluding the category, export prices were up by 0.8% in July following a 0.9% increase in June.

On a year-over year basis, export prices were up by 10.2%, agricultural prices were up by 39.9%, and ex-ag prices were up by 7.5%. All of these margins were the highest in the history of the available data.

The average spot price of crude oil fell last month by the largest amount in almost two years and this is expected to translate into a hefty decline in the overall import price index. This would be welcomed by both stock and bond traders.

On Thursday afternoon the Treasury will release its budget figures for last month. In August of last year, government outlays exceeded receipts by $117.0 billion. Next week’s report is expected to show a smaller deficit of about $105.0 billion. The reason for the prediction is partly due to the fact that July’s deficit figure of $102.8 billion was much larger than anticipated and may have been skewed by calendar issues.

But even if the prediction is accurate, the running total for the fiscal year to date (begun last October) would be a deficit of $476.4 billion, a far larger gap than the $274.2 billion posted for the same period in the 2007 fiscal year. Large deficits are bad for Treasuries because it means more securities will have to be issued to cover existing debt and government operating expenses.

Friday has a heavy slate of economic releases. A major release is the retail sales report for last month. In July’s report, the Commerce Department said the seasonally adjusted level of sales slipped by 0.1%, the first contraction since February. However, the report said that the level rose in June by 0.3% instead of the originally reported 0.1%.

A large but volatile sales category is automobiles and light trucks. Sales there fell by 2.4% in July — a sixth consecutive contraction. But even excluding the category, sales were up by 0.4%, a weaker increase than June’s 0.9%,

Another large and volatile category for obvious reasons is sales at gasoline stations. The level in this category rose by just 0.8% in July. Excluding both the auto and gas station categories, sale rose by 0.3%, the smallest increase since a flat reading (0.0%) in February.

According to recent reports from auto makers, sales remained weak last month and sales at gas stations are expected to be soft because of falling prices. Consequently, predictions call for only a slight gain in overall sales in August and excluding autos, sales are expected to be little changed.

Another major release on Friday is the Producer Price Index (PPI), a gauge of inflation at the wholesale level. It rose by 1.2% in July following a 1.8% rise in June. The volatile category of energy was a major contributor with an increase of 3.1%. Another volatile category, food, rose by just 0.3%. But even if these volatile categories are excluded, the so-called core index rose by 0.7% in July, the largest increase since November of 2006.

On a year-over-year basis, the PPI was up by 9.8%, the largest Y/Y increase since June of 1981. The energy index was up by 28.0% Y/Y, the largest margin since November of 1989. The core index was up by 3.5% from last July, the largest margin since June of 1991.

Price pressures were also high further down the production pipeline. At the intermediate stage of production the price index rose by 2.7% in July following a 2.1% rise in June and a 2.9% rise in May. Excluding food and energy, the index was up by 2.0% in July.

On a year-over-year basis, the intermediate index was up by 16.6%, the largest jump since April of 1980. The core index was up by 10.2%, the largest Y/Y margin since September of 1980.

At the initial or crude stage of production, prices were up by 4.2% in July. On a year-over-year basis, they were up by 52.1%, the largest increase since January of 2001.

August’s headline figure is expected to be welcomed by both stock and bond traders. Because of the decline in oil prices, the index is expected to have declined by 0.3%. If this is the case, it would be the first contraction since last December. The core index is expected to have risen by an in-trend 0.2%.

As noted above, the report on business inventories for July will be released on Friday. The report on factory orders has already revealed that manufacturers’ inventories rose by 0.5% and by Friday we will know the disposition of the wholesale sector. The only unknown will be the retail sector. If the wholesale level rose by the predicted 0.7% and the retail level rose just slightly, the overall inventories level would have risen by about 0.5%.

This would be a deceleration from June’s rise of 0.7% but it would be the sixteenth consecutive expansion. The I/S ratio came in at a record low 1.23 in June and July’s is likely to be as low or possibly lower.

The final release of the week is the preliminary report on consumer sentiment from the twice monthly surveys conducted by the University of Michigan. Due to shaky economic data and the rise in gasoline prices over the last year, consumer optimism has been trending down. The overall index hit its lowest reading in June since May of 1980.

But since gasoline prices have eased, the index rose in July and August after nine straight months of declines. Another rise to between 64.0 and 65.0 is predicted for Friday’s reading but this would still be sharply lower than the final reading of 83.4 posted in September of last year . . . .

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Just as individuals need to have at least some basic creditworthiness in order to function well in the world today, businesses also need to have access to credit in order to grow and thrive. In many ways, business credit building is very similar to building a personal credit profile.

Business credit scoring works just the same way that personal credit scores work, and so one must also build business credit history starting slowly at first with small loan amounts. Done correctly and successfully, building business credit can lead to the ability to seek large amounts of capital for continuing to build and expand the business.

There are two primary reasons why people seek to build business credit. The first is to keep business and personal financial dealing separate and the second is to have access to the larger lines of credit that a successful business cans secure which are simply not available to individuals.

In order to truly separate your business finances from your personal finances, you will need to form a separate legal entity such as a corporation or a limited liability company (LLC) that can legally function separately from you and which can also apply for an EIN from the IRS, which is the equivalent of a social security number, but issued for businesses.

For those looking to build business credit fast, you can purchase a “shelf corporation” which is a corporation that has already been formed. The cost of a shelf corporation will vary from state to state, and will vary depending on how long ago the entity was formed and what additional support services the service company provides to your new corporation. While a shelf corporation will not have any kind of business credit history established, it does give the lenders the impression the the company has been around longer than last week when you filed the papers on a do-it-yourself incorporation.

While one of the advantages to business credit building is access to larger credit lines, the new business must start out with the basics of acquiring small lines of credit. One of the best places for a new small business to start is with gasoline companies and office supply chain stores which usually have some of the most lenient credit requirements available.

Business credit normally does have more categories than in personal finance and these typically fall into several areas such: banking, bank credit, trade credit, equipment leasing, credit cards, and financing of accounts receivable.

How to build business credit score from the starting point requires that the business maintains their checking accounts in good standing, pays their trade accounts on time, makes all loan and credit card payments in a timely manner, and keeps up with lease payments. Gradually, this building business credit history activity will allow the business owner to seek higher lines of credit.

However, the same principle of not becoming overextended apply to a business just as it does to an individual. Just because one can get more credit, does not mean that one should get more credit or use it all to the available limits. The purpose of business credit should be careful expansion, but going into debt unchecked will more than likely crush a new business rather than help it.

Business credit building can be a challenge, because you are now responsible for building and maintaining two different credit profiles, but it is also very rewarding as your business starts to take on a financial life of it’s own that can provide you with a sense of accomplishment and additional financial options and security.

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The number one reason that new companies fail is because of lack of sufficient cash flow or access to credit lines in order to see the business through crucial periods of growth or to expand the business to the next level. For the wise businessman, corporate credit building is a priority from the first day of business.

Anyone who starts a business but who fails to plan their strategy for building corporate credit is, in a sense, planning to fail. Just about every viable business will sooner or later feel growing pains that are intensified by the lack of business credit. Those companies that do not anticipate such challenges are likely to not survive and end up folding up shop.

The primary benefits of corporate credit building include establishing a financial profile of your business so that when it is needed you will have built access to the capital you will need to take your business to the next level. In today’s competitive environment, if a business stagnates, or if it cannot take action on innovative ideas, or simply cannot keep up with the competition, that business will be left behind to either struggle along or simply close.

Building company credit in order to increase the availability of capital and favorable loan arrangements is one of the most important facets of any business that is intent on being successful. When corporate credit building is properly done, a company will be able to navigate through business challenges such as:

– Start up capital and initial marketing costs.
– Separating of personal credit from the business credit profile, which can greatly   reduce personal risk and increases access to credit.
– Handle periods of slow sales.
– Manage seasonal changes to the normal business flow.
– Procure supplies needed to fulfill a large order.
– Upgrading and maintaining crucial equipment.
– Purchasing new equipment.
– Hiring and training additional employees.

Those are just a few of the many challenges that can be ameliorated with quick access to corporate credit loans. But because business credit building takes time, just the same as building personal credit, it is best to start off right away so that when those challenges come you will be prepared and know exactly who you can go to to get the funding that you need.

For a brand new business, one sure place to start is with an application for credit with your a national office supply chain store in your area. This is usually a great place to start because you will be needing at least some supplies that they carry, their pricing is generally very competitive, and they tend to be friendly to opening new credit accounts for new small businesses.

Another good early source of credit for your business are the gasoline companies which also generally make it easy to get a credit card with them. Keep in mind that in order to build a track record with these new lines of credit, you must use them on a regular basis, and since most businesses use gasoline and office supplies you can establish credit buying things you already need and use.

After you get a couple accounts open, corporate credit building can be as simple as using those lines of credit regularly and paying them off monthly and always on time. Over time, you will be able to get larger credit limits on those accounts, to open corporate credit cards and to secure business lines of credit from other lenders, all because you understood the benefits of business credit building and took strategic action.

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When you hear the term creative financing, in most instances it will have something to do with an “outside of the box” method of acquiring real estate.

Real estate and real estate investing could be considered entrepreneurial hot spots that have drawn the attention of people wanting to build wealth and creative financing for home loans is right in the epicenter of that interest.

The primary goal of creative financing in real estate is for the buyer or investor to be able to purchase a property with very little or no cash out-of-pocket for the buyer. This is also known as using OPM (Other People’s Money) to invest in real estate.

For the average person who finds it difficult, if not simply impossible, to come up with a down payment of 10% to 20% in order to get financing on their house, creative funding options may be the only solution that will allow them to even get into a home and enjoy the benefits of homeownership, including equity building.

Once a person or family is able to break through the barrier of getting into their first home, perhaps with the help of creative mortgage options, they can then plan to re-finance after a period of two to three years, and they will have their “foot in the door” to beginning to create wealth. For the average person, their greatest source of wealth building comes through homeownership.

In the case of the real estate investor, the motivation to use creative financing to put as little money down as possible on a property usually has much more to do with earning the highest return on investment (ROI) that he can and with being able to invest in more properties with the same cash.

Consider a scenario where an investor is able to purchase a property with a 10% down payment on a $100,000 house, so he has $10,000 cash in the property. If the house increases in value by 10% over the next year, that investor will realize a 100% return on the cash he invested, which most people would agree is a nice ROI.

However, if the investor was able to get into the same property with just 2% down, at the end of the year with the same increase in value, the investor would enjoy an ROI of 500%! Impressive!

In addition, this kind of creative finance scenario also means that if the investor was able to buy the house with just 2% down, then he would still have $8,000 capital available to invest in additional properties which could each result in similar returns on that cash investment.

While there are many different approaches to creative finance, two of the most poplar are hard money loans and private mortgages. A hard money loan is made by a hard money lender who usually has a pool of investors who are willing to lend money at higher interest rates, and usually strictly based on the value of the property as opposed to the credit score of the borrower. These are normally short-term loans and also carry points of at least 3% to 6%.

Private mortgages are most commonly loans given to a buyer by the seller of the property. In the case of a young couple who wants to buy a home but has no down payment, if they can find a seller who is willing to write a private mortgage for the down payment amount, then they will make an additional monthly payment to the seller. This creative financing can work well, but some traditional mortgage lenders prefer to see a cash down payment.

Creative financing can take many other forms as well, such as trading one type of property for another, setting up a simultaneous closing, making an arrangement for a lease option, or acquiring a loan with a balloon payment. With a little resourcefulness and tenacity creative finance for real estate is possible and can reward you well.
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If you are looking to invest in real estate, one of the most popular and stabile investments available, but you don’t have a great track record yourself, you might want to consider looking for a good credit investor that you can partner with.

Often there are busy professionals who have high credit scores, but who do not have the free time needed to do the proper research involved in finding profitable real estate deals, but who would be interested in leveraging their rating in a good financial investment.

A credit score that is considered “good” starts at about 700. From there, the higher the number, up to 850 which is the highest score possible, the better the rating. When a score is over 700, new opportunities open up to credit investors looking for asset building.

The first benefit at this level is that it opens the way to finance multiple investment properties so that you can maximize your investment strategies and use other people’s money to do so. Having a good credit score also means that investors will pay lower interest rates, and lower fees and points, for their financing and also they will generally be able to make smaller down payments, which can significantly increase the ROI (Return On Investment) making a good financial investment even better.

For a good financial investment looking for asset creation and profitability, the less cash that is required as a down payment, the higher the ROI and therefore the greater and faster profits build. For instance, for someone with a fairly low credit score a 20% down payment may be required, but for the good credit investor only a 5% deposit is needed.

Let’s look at this in an example of purchasing a $100,000 property, and assume that after one year the property increase in value by 10% or $10,000. In this scenario, the person with the lower credit score would have earned an ROI on his cash investment (the down payment) of 50%. That is certainly not a bad return! But, the investor with the higher score would realize an ROI of 400% on that same investment because his cash outlay was so much less. Earning 400% on your money in a year would undoubtedly be considered a good financial investment program in anyone’s view.

This is just one powerful example of the value of building a strong credit profile. Such a financial standing puts the investor in the position of better leveraging other people’s money, which results in higher returns and profits on the out of pocket cash investment made. And, the profit gets even better if the a property can be purchased with no down payment!

Some people are wary of going into so much debt in an investment, but experts are quick to point out that there is a vast difference between the good use of credit that can lead to wealth creation, such as outlined in the above example, and what they call “dumb debt.” Some examples of dumb debt are buying things on time that you really cannot afford and that have no lasting value so that you end up still making payments on long after you stop using it or do not even have it anymore. The good credit investor knows the difference and is confident taking on debt for assets that grow in value and return handsome profits.
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