Wednesday, November 07, 2007

Paulson’s comments: 3 years late and a few hundred billion dollars short (Not bad for guvment)

I have been out of town for a rather large portion of the past 6 weeks. I have traveled all over the country and to our neighbors in Canada. I will say that it sucks to go to Canada and see ".90" taped to cash registers so 'we' would know that the US Dollar was only worth 90 cents to them.

I don't have time for a long post, and honestly I don't know what else I can say that I haven't already. I will reiterate that this 'thing' is going to be way worse than the Fed, Wall Street, and most analysts predict. I have said it many times before...the 'data' these people are analyzing is trash. They are analyzing numbers but have no idea what is really behind those numbers. Remember a few months ago where many 'experts' said this was quickly working it's way through the system? Were they right?

Since it has been a while, let's look a few things quickly:

Now have the Treasury Secretary Henry Paulson chiming in on the 'mortgage mess'. I don't know if these people really are clueless, or if they have a 'financial' interest in always being late to the party with their comments. I know they don't want to start a panic, but would it have been so bad for them to tell people to only buy what they can afford when the real estate bull market was off and running? Come on people, this is NOT rocket is basic high school math. I don't have a lot of time, but let's look at a few comments from Secretay Paulson.

Paulson said that government and the financial industry should provide immediate help for homeowners trying to refinance current mortgages before they reset at much higher rates.

Just how should government do this? Government gets money from 1 source...the taxpayers. So any type of guvment assistance is coming from taxpayer dollars. I reread the US Constitution again, and no mention anywhere about taking money from people that can afford their house and taxes, and giving it to people that cannot afford the mortgages that they legally signed onto. I don't care what fancy terms the government ends up using, there should be ZERO bailout of banks or borrowers. I know there will be repercussions...just like doing 21 shots of vodka on your 21st birthday. It sucks when the party is over and you are are wrecked mess...but learn from it, and don't do it again if you don't like feeling like crap.

What I really want to get into is how the financial industry can help things. What are they supposed to do? The financial industry keeps getting pressured to 'refinance' borrowers no matter what. But tell me how the heck you are supposed to do that??? Let's do something that is obviously old fashioned...let's crunch some numbers!!!

Let's look at a homeowner that is going to foreclose on their $450k 'starter home'. Let's say they did a 3 year 100% interest only ARM at 5.5%. That puts their mortgage payment at $2,062.50 (not including taxes, insurance, or anything like that). Now let's assume their mortgage adjusted and they have to start paying principal and the rate jumped to 6.5% (which could still be low...but for the sake of numbers it will be fair). Do not forget that because they made an 'interest only' payment for 3 years, they have to pay off the loan in 27 years. Let's look at the new principal and interest payment at the higher rate for the $450k loan. The new payment for the next 27 years paying principal and interest is now: $2,949.99. Outch!!! I don't know too many people that can afford another $800+ a month when their mortgage payment adjusts.

To make matters worse, not only are property values dropping, but so is the value of the dollar. Buying a $500k house that loses 20-40% in value is like getting punched in your stomach...combine that with the fact that the value of the dollar has conservatively dropped 10% is like getting kicked in the balls afterwards.

BUT, getting kicked in the balls isn't so bad if you get a 160 million dollar 'parachute' afterwards. Yes, you know what I am talking about.

I actually saw an article where they used the word 'trillion' to describe the amount of potential damages caused by this 'subprime' mess. Sadly, I am not surprised one bit. Every level of government in this country from the city, state, and federal level is in debt. They spend on emotion and not on logic. And somehow we are surprised when businesses and individuals do the same. The only difference is that individuals cannot just 'print money' or use the power of the 'gun' to generate higher tax revenues.

Anyway, I am going to continue posting here as I have time. Don't worry, if and when something major happens, I will be here to discuss it. Don't worry, I am following what is going on. This thing is going to take YEARS to pan out, so don't lose sight of that. I am focusing on my other business, and things are going well.

Stay tuned...