The Bottom Line
By Chad P. Wilson
August 24, 2007
Foundation Bank --
The Bottom Line
Special Edition: Humble Pie - What can we learn from a Mortgage Mess?
Volume III Issue VI – Friday, August 24, 2007
A monthly newsletter of financial commentary for our friends
Remember that Humility thing I talked about last month. It is alive and well. Many people have been humbled since the writing of our last newsletter. Stock Investors are an example. The DOW is down almost 6% from its highs. This has been long overdue. Quite frankly, we thought this correction would have come in January. Our assumption was 6 months to early and so we have taken our bite of humble pie. However, corrections are a healthy thing for the long-term investor. They shake out the half-hearted investors, and shake up the overly aggressive. Speaking of shake up, let’s talk about the areas that have been humbled the most:
1. Mortgage Lenders - According to CNBC there have been over 70,000 layoffs in this industry so far this year. That is twice the number of layoffs in the industry for the entire year of 2006. If that blistering pace continues, over 140,000 people connected to the mortgage market will be looking for jobs. What has been the cause? It has been a re-pricing of risk. Many lenders were so interested in beefing up loans over the last 5 years, that they have been willing to lend to anyone who had a pulse. Whenever underwriting is compromised, it will eventually catch up with them. So in late July, it was like the entire market woke up and realized, “Hey, I’ve got some really risky stuff that I’m invested in and I’m not getting a return that is equal to my risk.” This caused some of the big banks that are lending money to Mortgage Lenders for their mortgage operations to ask for more collateral to secure these loans. Some mortgage lenders were already up to their eyeballs in debt, so they couldn’t come up with the extra collateral. That lack of access to cash or collateral caused the house of cards to come crashing down.
2. Sub-Prime Borrowers – Some of these borrowers were given Adjustable Rate Mortgages they could just barely afford. Now, some of those mortgages are adjusting up 2-3% higher than the initial rate. For some, it has been too much to handle. This has caused foreclosures to rise, since they can’t stomach the higher payments. According to RealtyTrac, foreclosures nationwide are up 93% from a year ago. This has resulted in lenders tightening their standards, which will make it harder for these borrowers to refinance old loans or take out new ones.
What can we learn from this? First of all, the Tortoise wins the Race. Do you remember the story of the Tortoise and the Hare? Fast is not always good. Many times, business growth can get moving so fast that things fall apart. As a business owner, don’t be consumed with “growth at any price.” Otherwise you’ll end up paying that price down the road.
Secondly, do business with a trusted name that will be here tomorrow. Don’t look for companies that are like lighter fluid that burns bright and glorious but burns out fast. Look for solid companies that are more like glowing coals. They may not be flashy, but they’ll be consistent.
Lastly, don’t carry too much debt. It’s old advice, but it’s good advice. Too much debt leaves you completely exposed. If you hit any bump in the road (loosing your job, air compressor breaks, unexpected medical procedure) you’re up a creek if you don’t have a cushion in an emergency fund. Debt is a tool, not a way of life. And anytime you have debt, you leave yourself vulnerable.
We hope these lessons are helpful for you and your business in this journey called life. It is by God’s Grace if we can learn lessons by watching others’ mistakes, rather than having to have our own taste of humble pie.
Chad P. Wilson, CFP
Foundation Bank – a division of McKenzie Banking Company - 731-554-2423
The above is strictly informational commentary and does not constitute any sort of recommendation. Consult the services of a confident professional for specific loan, investment, tax, or other financial advice
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