Lehman Fails, Merrill Sold, Fannie & Freddie Rescued - How Can This Be Good?

The headlines certainly portend a very dicey time for the world economic system. However, at a very personal level, these watershed events can be good (in the end) for you and me - the average consumer. How, do you ask, can seismic disruptions to the world financial market benefit you?

Let's take a look at the bigger picture. You and I live our daily lives in what we can call "The Real Economy." That is to say, we spend the money in our wallets to buy tangible "stuff" every day like food, clothes, gas, etc. We operate our finances in a pretty simple way, too. It's basic, spend less than you make so that your have more than you need at the end of each day. Otherwise, you go into debt. Either you can service (pay for) that debt, or you can not. If you can not, you go bankrupt. It's really that simple. Large financial institutions operate in more of an economy of the ether (air). In that they buy and sell futures, derrivatives, futures on bets on what the federal reserve will do, long term bonds, short term bonds, corporate bonds, government bonds, municipal bonds, school bonds, etc., etc., etc. Some of these things are real what I would call "real" like stocks, real estate and bonds. Other instruments, though, are more "in the ether" and where this all comes unwound. Instruments like derrivatives, futures and the like are bets on what things "should" do - and by their nature - contain much more risk. Now, I'm watering this down a LOT - so, those of you reading who will take issue, your objection is duely noted.

All that said, we will see more banks and brokerages fail. As taxpayers, we will feel some pain from this as the US Government will (and already has) participated in the mop-up that ensues watershed events such as these. The bankruptcy filing by Lehman Brothers comes in at a whopping $613,000,000,000.00 (BILLION with a B). That dwarfs the previous filing of Worldcom in 2002, Enron in 2001 and Drexel Burnham Lambert in 1986. How can this be good? When these events unwind, the initial period is often akin to a REALLY bad case of the flu. You feel sick to your stomach, there's no end in sight, you can't sleep...there's just nothing that good about it. When the dust settles, there are fewer players in the game. The rules have typically been reset in such a way that new controls are in place to keep some of the bad things from happening again in the future. And, some unexpected good things will happen. For instance, mortgage rates will come down as a result of this as investors - both individual and institutional - seek the relative security of long-term bond investments vs. riskier hybrid and stock investments.

Along with that, the fall of one or two more big players in the financial services sector will be good for the larger economy in time. Sometimes you can have too much of a good thing. Too many players doing the same thing in the same space with the same money leads to a house of cards being built up....which has to fall. Today, we see the fall of two giants in the form of Merrill Lynch and Lehman Brothers. Stay tuned, it's just going to get more interesting from here. As Neil Peart says..."Adventures Suck When You're Going Through Them!"

We will look back at these times as an adventure - perhaps not an enjoyable one - but, an adventure none-the-less. Look for rates to move lower this week...which could actually spur positive activity for the housing market....which, is good for the broader US Market....see, a silver lining!

GOOD FOR YOU = The Impact of US Gov't TEMPORARY Takeover of Fannie Mae & Freddie Mac

Well, we sure have had an interesting 48 hours in the Hayden house! As you may have heard or read by now, the U.S. Government took temporary control of Fannie Mae and Freddie Mac yesterday (Sunday). This is the most dramatic step by the US Government to stabilize the US Economy since President Roosevelt established the Federal Housing Administration (FHA) and Fannie Mae during the Great Depression.

There are a multitude of points and conjecture that are certain to be gotten "wrong" about this in the media AND on the campaign trail this fall. Don't be sucked into the incorrect information. The inner workings of both of these firms are incredibly complex and - frankly - designed to lessen risk rather than increase it...no matter what you may read out there. So, don't be fooled by a 1500 word article that tries to explain 70 years of product development and the intertwined nature of investors, secondary markets, retail origination, etc., etc., etc. There are bound to be some things left out .

The basic premise that has been laid out before us is simple. By placing the companies into a temporary conservatorship (meaning, they will be run by the US Government through the end of 2009) the US Government has also placed the full strength of the US Treasury behind the companies so that financial markets can continue to function smoothly and without disruption. Doing so makes the investment community view the investment in mortgage bonds MUCH more favorably - driving down interest rates and making loans more available and affordable. It's that simple.

Already this morning in early market activity, we are seeing the likelihood of interest rates on a 30 year conventional/conforming loan DROPPING 0.25% to 0.375%. That would put a 30 year fixed in the high-5's for the first time since early this year - and only the second time in the last 3 years. This is a BIG DEAL. A GAME CHANGER, if you will.

I encourage you to share this POSITIVE news with everyone you know who is a homeowner, or prospective homeowner. I also ask that you let them know that I am very interested in talking with them to learn if I can help them to finance (or refinance) their home loan in a consultative, professional and thoughtful way.

For those of you who are my past clients, I will be contacting each and everyone of you individually in the coming days to share the potential positive impact this can make for your family.

My warmest regards,

Rich


Rich Hayden
Mortgage Banker, HomeFirst Mortgage Corp
207 South Alfred Street, Alexandria, VA 22314
703.926.4646 (m) 703.832.6467 (f)
Email: rahaydenjr@yahoo.com
Go To: My Website