Another September to remember: September 2008
Posted in Technology, Tools and Tidbits By Stefan Swanepoel, Monday, September 15, 2008.The Financial Market Disaster of 2008
September 2008 is exactly two weeks old today, but what a September it has already been. The events of late are unsurpassed in living history and I think that 9/08 may very well be remembered as the worst financial disaster in history.
It started this month when mortgage giant GMAC Financial Services announced that it would close all of its 200 retail offices and lay off about 5,000 of its employees. The 60 percent cuts were in their mortgage lending division, Residential Capital, the seventh-largest mortgage originator in the country. ResCap's losses for the second quarter of 2008 were $1.86 billion.
Then the first weekend saw the government seize housing finance giants Fannie Mae and Freddie Mac in the largest mortgage rescue in global history. These two companies have lost some $14 billion over the past year and according to Treasury Secretary Henry Paulson, the intervention was necessary to save the U.S. economy.
Collectively these two giants hold about 50 percent of the country's mortgages, and their initial $200 billion bailout symbolizes the largest bailout ever by the U.S. government.
Less than two months ago, Pasadena, Calif.-based Indymac, the seventh-largest savings and loan and the second-largest independent mortgage lender in the nation, failed at an estimated cost of $9 billion. This was soon followed up by the government providing $29 billion in loans to salvage Bear Sterns in a shotgun marriage to JP Morgan Chase.
And now in the second weekend of September, Merrill Lynch & Co., in the eye of a global financial breakdown, decides in 48 hours to find refuge and opts to be acquired by Bank of America for around $50 billion.
Meanwhile, after Barclays ditches acquisition plans, 158-year-old Lehman Brothers files for Chapter 11 bankruptcy on Sept. 15. Estimated at $639 billion, this will be the largest bankruptcy filing ever in U.S. history -- even bigger than Enron and Worldcom combined.
Still coming is AIG's request for a $40 billion bailout by the feds and increasing speculation that the U.S.'s biggest savings and loan, Washington Mutual, will be the next casualty.
What an incredible September this has been and we're only half way through it.
But, looking on the positive side, we saw the 30-year fixed rate drop almost immediately from around 6.5 percent to near 5.7 percent. Starting next month the Treasury will also be buying back $5 billion of mortgage-backed securities, thus placing more money into the mortgage market.
This should drive rates even lower. Who knows, we may actually see 5.1 percent again before Christmas -- a rate we last saw at the height of the housing boom back in 2004/05.
So here's our blog discussion for this week: What are your thoughts on what is going to happen to: 1) The financial market and 2) the housing market over the next 18 months?
What a mess! Come on, tell me what you really think.
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Submitted by Glenn Ginsburg on September 15, 2008 - 10:08am.
One has to start thinking along the lines if so many financial institutions are being acquired by one or more larger financial institutions can these large financial institutions absorb the losses from this point forward.
Large corporations are supposed to have the resources to be efficient and create productivity, however, as we see from the real estate market (especially with potential short sales) are there any efficiencies or productivity enhancements? Some of the larger financial institutions are doing a miserable job in dealing with the current situation regarding a potential sale.
I suspect we are going to see more unstability with the financial institutions - B of A does call for a watchful eye.
What drives the housing market is partially consumer confidence - what is today's consumer confidence? The investments of consumers are at risk and they will look for a safe haven - watch federal securities and savings accounts (FDIC insured) increase.
Glenn Ginsburg
Naples Florida
Submitted by Misty Lackie on September 15, 2008 - 11:48am.
"worst financial disaster in history" is a bit over the top. See http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
This is the type of reporting that puts people in a panic and scares them away from investing, spending money, etc.
Submitted by Carmen Multhauf on September 15, 2008 - 12:27pm.
In 2002, a national policy was put into place to increase homeownership to 70% by finding ways to create 5.5 million new minority buyers. The housing industry was encouraged to find solutions to the socioeconomic issues that deterred minorities and immigrants from purchasing. These solutions would include no downpayment loans, no doc loans, and loan products with very low initial starter rates. These financing alternatives offered greater flexibility in underwriting guidelines and affordable mortgage products. Minority ownership rates grew at an accelerated rate. Then came the resets. The rest is today's headline.
Submitted by Tom Teece on September 15, 2008 - 12:43pm.
Great article, Stefan. I think we all should look at the path our financial leaders have taken us down to be where we are today. We only need to be afraid if we don't demand change. The policies and procedures that allowed the housing-mortgage-credit problems to occur, can no longer be tolerated. If we stand by and do nothing, we will all contnue to lose. I just got Robert Schiller's new book "The Subprime Solution". I'm glad to see it generating more talk about solutions than just focusing on the problems.
Submitted by Michael Daly on September 15, 2008 - 12:57pm.
Stefan, I see this as an inevitable 'cleansing' of the markets and a payback for the 'irrational exhuberance' that preceeded it the past 5-6 years.
Treasury Secretary Paulson, whom we all know is really former Goldman Sachs Chairman Paulson, spoke of the 'moral hazards' in todays news conference while indirectly referring to the Fed's passing on bailing out Lehman Bros.
Many of us - even CEO's of Financial Institutions - thought we could do no wrong during the days of 20-75% annual appreciation in real estate. And for so many companies - real estate, mortgage, financial services, etc., the saying 'volume hides a lot of sins' has come home to roost.
So, to your question: I don't pretend to know what will happen in the financial and real estate markets in the next 18 months, except that anyone who provides a service in those industries and wants to thrive is going to have to re-invent themselves.
I'd be interested to hear Brad Inman's answer to this question, as he called this from the begining.
if you havent already, check out Shillers new book, The Subprime Solution. see my blogpost at:
http://thehamptons.wordpress.com/2008/09/09/ouch-ok-mr-shiller-you-were-...
Michael Daly
The Hamptons Real Estate Blog
Submitted by Stefan Swanepoel on September 15, 2008 - 1:28pm.
Misty
The reference you made was to the 1929 Stock Market Crash, an event that most of us are familiar with. By no means do I wish to downplay the severity of the Great Depression, but at the same time I would caution you to not under estimate the magnitude of what is currently happening to the financial markets. The post says "may very well be" and (unfortunately) I believe that to be a real possibility.
Stefan
Submitted by Stefan Swanepoel on September 15, 2008 - 1:31pm.
Tom
I agree Tom, change is so important. The difficulty is always to determine the “correct” change – change that with hindsight we would still have implemented.
Stefan
Submitted by Stefan Swanepoel on September 15, 2008 - 1:36pm.
Michael
Ah, the “irrational exuberance.” I agree, payback it is.
One wonders what the ultimate price will be and whether we will learn from our mistakes.
Thanks for the book tip - The Subprime Solution – I will make it may next plane read.
Stefan
Submitted by Bill Shue on September 15, 2008 - 1:36pm.
Why is it that we only hear about these failures at the very end when just a few weeks ago the CEO's of these compnaies tell us everyhting is just fine. Who knows haw many more we have not heard about.
Bill
Submitted by Damien Hall on September 15, 2008 - 1:57pm.
Bill:
Your point is well taken. If you remember, Secretary Paulson said during a Senate hearing that he wanted the authority to take over Fannie and Freddie, if needed. When asked if he would exercise that authority he said that he didn't think it necessary. Just the 'authority' alone would stablize the markets. Then Monday, Sept 8th, comes and Christopher Dodd is surprised to hear the news that Fannie and Freddie are being taken over by the government.
Everything is always fine to the people at the top, but behind closed doors it's a mess! That's what makes a lot of people hesitant and any downward movement in the market puts people in a panic.
Submitted by Chris Adams on September 15, 2008 - 2:22pm.
None of us are underestimating what may happen, many of us are saying why did this happen and why didn't we know? Over the weekend, new questions marks appear:Lehman (possibly Wachovia?)-changing as we write our comments.
In my state, outside of urban areas, there is an estimated minimum of 18 months of inventory. This is a generally accepted number here.
The logic of softer mortgage rates, even longer mortgages-why not 50 years?-the 7,500 credit-foreign RE investment-all these things are what can be done.
They are still all just pieces in the puzzle.
Steven Stearns
www.obeo.com
http://obeoman.blogspot.com
262-325-8687
Submitted by Carmen Multhauf on September 15, 2008 - 4:07pm.
Bill,
Why would any investor have bought Fannie and Freddie when Paulson said he might take over (and wipe them out)?
Carmen
Submitted by Derec Shuler on September 15, 2008 - 11:41pm.
Unfortunately, when the CEO of a company starts talking about the demise, that's usually the end since it's basically acknowledging a will to no longer live. The CEO also has to be a cheerleader. Paulson gave testimony to Congress and was given the authority to conduct a takeover if needed. That should have been seen as a sign.
Derec Shuler
Blog.TheShulerGroup.com
Follow me at:
www.linkedin.com/in/shulerd
www.twitter.com/derecshuler
Submitted by John Blogger on September 16, 2008 - 6:53am.
Doesnt look good for Washington Mutual. What a mess that will be if they go too.
Strange how the lanscape of top players can change overnight. I predict that this is what is going to happen to real estate brokerages companies as well.
Good post Stefan. Thanks.
John
Submitted by Bill Shue on September 16, 2008 - 7:36am.
Forget Washington Mutual. What if AIG goes down. The largest insurance compnay in the world. I believe over a trillion in assets.....
Submitted by Stefan Swanepoel on September 16, 2008 - 1:50pm.
You're right. AIG would be huge. Both would be another major blow to our already fragile financial deck of cards.
Submitted by Michael Daly on September 16, 2008 - 3:00pm.
I don't pretend to know what would happen if AIG went south. That being said, it just might be what the financial services community needs to wake up! The new term: "Moral Hazzard"
Submitted by Stefan Swanepoel on September 18, 2008 - 7:17am.
AIG Saved?
Under the terms of the bailout, the AIG receives $85 billion and the government 79.9% of the company. AIG has two years to pay off the loan, which carries an interest rate of 11.4%.
With $1-trillion in assets and some 74 million customers this financial bailout will probably save various other financial institutions that were insured by AIG.
Will it however calm the nerves in the financial market enough to stop the hemorrhage?
Submitted by Jeff Manson on September 18, 2008 - 7:28am.
That is just great. Now the government (we) owns a failing insurance company. Did not look like it helped the fears of consumers or investors by how the stock market re-acted yesterday :-(
Jeff Manson
American Dream Realty
Hawaii real estate
Oahu real estate company
Submitted by Larry Wright on October 10, 2008 - 10:06am.
The economic environment of this past September motivated us to provide flat fee listing services. For many years we've operated as tech consultant for real estate professionals and have resisted this move. This year I have turned away such a volume of listing requests that I couldn't ignore Seller cries for 11th hour rescue. In September we received calls from property owners locally, out of state and even from New Zealand. All of them need to liquidate assets but don't have the equity to pay a traditional listing commission.
So now we're a limited service provided and receiving sour looks from old timers that are resistant to change. But because of our move Sellers can afford to sell, Buyer's agents have more opportunities to earn commissions, and banks are getting risky loans off their books.
Wish us luck!
Larry Wright
www.nwRealty.com
www.nwRealty.net