Did I get a shock about 2 months ago. I attempted to switch my homeowners insurance provider. When calling around for quotes, all came in $40,000 lower in relation to what I owe and what the local government states the property is worth, or better, what I pay personal property taxes on.
Future Homebuyers: You are in the drivers seat (If you can get funding). Before submitting a bid on a potential property, call a few insurance companies and get homeowners insurance quotes. Submit your bid “lower” than what the insurance company values the property at. But, don’t ever bid over their quoted value amount. Also, don’t let the seller know of the quoted price unless the bidding continues past 2/3 proposals. Let the seller know that your price is FIRM.
SELLERS: Patience is a virtue. Insurance companies are becoming illiquid like the major banks. They are repositioning their balance sheets which means adjusting their “risk level.” Good for the companies, but bad for consumers.
To those property owners with no intention of selling, go out and get a policy quote as well. Tell the insurance companies that you “may” consider switching. Do this just to see what the “true” value of your home is, what they value the property at and not what a salesman told you.
The speech President Bush gave tonight was useless. It served no purpose. Maybe to add some points to his presidential legacy, which as of today probably stands at “0″.
President Bush recited over & over a lot of Wall Street terms and terminology that Main Street Americans probably do not recognize nor understand. Many feel as though this bailout is only for the wealthy bankers in the U.S. There was hardly any mention to help those struggling financially because of unemployment, the rise of health care costs, etc…
This only solidifies Senator Obama’s campaign that much more.
During President Bush’s 2nd term, he put together a panel to look at privatizing social security. His premise was to allow the American public to manage their own money for retirement instead of the government.
The negative side of this would be that we would now turn ordinary people (Not to sound elitist) into investors. But, from my understanding, the Social Security Trust Fund, similar to the FDIC, is surviving on credit. Meaning, there is no cash in the system and there will probably be none when many of us retire.
For people like me, there is a high likelihood I would not receive any social security benefits. With the present bailout proposition and the costs of financing the War on Terror, I don’t feel very optimistic. Those born after 1960 should not feel optimistic either.
I would not mind investing for my retirement. The U.S. government does not seem to be good at this art. Also, most government sponsored investment plans will not let you pull your money out until either retirement or termination. This means if I had my 401K or 403B dollars going into a fund whose top holdings included Lehman Brothers, Fannie/Freddie, and maybe AIG, it would be down substantially right now. The only option I would have is to switch funds or attempt to ride out the wave. Both of which are very time consuming and would not protect me from losses.
Hopefully one of the presidential candidates will revisit this proposition. I trust my personal money decisions more than I do D.C. politicos.
The housing crisis is not a distant memory but I will bet that the common man on the street recognizes the industry problems.
The SPECULATORS believe the Student Loan market is next bubble to burst. Student Loans can be securitized as were mortgages, credit card loans, and auto loans.
The premise in the U.S. is that a college education is the tool necessary for financial independence, and there may justifiably be some truth to that.
However, the job market remains challenged. Translation, new graduates will have a difficult time making monthly student loan payments if they are unable to find employment. Translation #2, the student loan portfolios will diminish in value. Translation #3, these securities will be written down in value and the companies holding student loan debt will need to find additional capital. (Same story with Bear Sterns, Citigroup, and Lehman Brothers, just a different industry).
This leads to our consumer analysis on college affordability. We always stress the need to conserve cash. However, the U.S. savings rate is low and continues on a downward spiral. But, the costs of college continues to increase. This will make college unaffordable for many potential students.
Some schools do have billion dollar endowments (Princeton, Yale, Harvard, Stanford, University of Virginia), but the competition for these dollars will be intense.
College affordability, we imagine, will become a political issue by next summer. It’s probably too late to arrive as an issue now with the presidential election only a few months away.
The government bailed out Fannie Mae (Symbol: FNM) and Freddie Mac (Symbol:FRE) on Sunday night. The real reason was to protect investors and not YOU. Understand the financial ramifications to know this as we will attempt to explain.
The Fannie and Freddie business model is ingenious if you think about it. 1st, banks loan money to those for the purchase of a home. There is a mortgage created. Most banks then sell off that mortgage (reaping a small profit and leaving the potential 30 yr. interest windfall to the buyer) to other entities or the purchasers. They sell mortgages in bulk (Ex. Bank of America may originate and subsequently sell all of their 3rd quarter east coast mortgages to other parties) at a small discount as to what the bank could earn over the 30-year period.
Ex. You get a loan to buy a home for $200,000 (30-yr mortgage) at 6%. The bank stands to make (& my #’s may be a bit off) $350,000 over the 30-yr. period. So instead of waiting for 30 years, the bank would sell your loan to an investor (Lehman Brothers, Fannie/Freddie, Bear Sterns) for $237,000. The bank has just made a $37,000 profit (plus all of the origination fees you paid) in a little over a month.
Now the fun begins. The banks sells these mortgages in bulk. So they may sell $50,000,000 or more in mortgages at a time. When the investor buys the mortgages, they also don’t wait 30 years to make a profit. The investors re-package the loans and sell them as investments (Called CDO’s or Collateralized Debt Obligations or Securitizations). The way this is done is that the purchasers (Freddie/Fannie) borrow money from investors in the form of the CDO’s, with (ex.) paying an interest rate at 4% (What they pay for the loan). These loans are secured by the mortgages, or better yet, you and I paying our monthly mortgage payments. However, we pay 6% to the bank. So, the bank or mortgage purchaser can make a 2% profit/month (Difference from them paying 4% and the consumer paying 6%). Ingenious.
However, the problems came when the homeowners stop making their monthly payments. Foreclosures increased and the value of these investments, the CDO’s began to fall. With homeowners defaulting and not paying their 6%, then the holders of the mortgages could not pay their 4% to the investor groups who loaned money to the mortgage holders.
What happened to Bear Sterns, and what was about to happen to Freddie/Freddie was that the investors, those that loaned them money secured by homeowners mortgage payments, were going to ask these companies to take back these worthless loans. Too many defaults. Bear Sterns was not able to weather this storm and they were subsequently sold for pennies on the dollar to JP Morgan Chase (Symbol: JPM), which purchase was guaranteed by the U.S. Treasury Department to persuade JP Morgan in making the purchase.
To the homeowners, banks are not going back to the days of recklessly lending $0 down loans. They return to the fundamentals and require 20% or higher. When Hank Paulson talks about stabilizing the housing market with this government action, he really means preventing a run on the bank. Or in other words, preventing China and the other countries from loosing confidence in the U.S. financial markets and forgo purchasing our debt or investing in our companies.
Bottom Line: If you are not aware of global economics, including government intervention, you had better wake up. It’s all about bucks!!!!
U.S. Treasury Secretary; part of the Goldman Sachs Club
U.S. Treasury Secretary; part of the Goldman Sachs Club