Market Week: Don't get burned by Subprime.

You:
Scott, why on earth should I read this? I don t have a subprime mortgage, and as far as I know I don t own any of the complex securities that are affected, how could it possibly impact me?

Me:
Well, simply put, now that some risky bets Wall St. made have gone bust, the price of borrowing will go up for everyone, and the terms will not be as attractive as in the past, for everyone, subprime or not.

You:
Won t the Federal Reserve just cut interest rates and everything will be ok?

Me:
Not likely in our view. You don’t take years of loose lending criteria and fix it with a 10% decline in the stock market and a cut in the discount rate. It takes longer, and there are more ramifications. It will take time to discover all the lending mistakes made, recognize them and write them off.

You:
I read that home prices are falling some places, what should I do?

Me:
The cow is out of the barn on that one so to speak. We posted long ago (August of 2005) on the housing bubble and what you could do to protect yourself. You can find that post here:

The beginning of the end

Since 9/11 the US Federal Reserve has had an ultra cheap money policy to keep US Consumers spending and keep the USA and the World out of a Deep Dark Depression. It worked!

US households took record amounts of money out of their homes via refi and home equity lines of credit and spent it. China boomed. Now everyone has a garden settee, a high end grill, a new car. And a house, or two, and a condo somewhere nice. A boat, a Harley, a new Rolex, Viking range… But I digress…

It has only been since July of 2004 that the FED (US Federal Reserve) began to slowly and surely raise interest rates to “normalize” them.

Cause: Cheap Money

Effect: Money lent to less than credit worthy individuals

The Problem (a picture is worth 1000 words)

and

Worse still

Unless you pay cash for everything and have no investments or deposits, this is a problem for you too!

What you can do:

Get liquid. That’s right, start saving some money.
Keep automatic investment programs like 401k’s going, but look at your current holdings and assess your risk tolerance.
Check your credit score at www.myfico.com. Are you above prime, prime or subprime?
Don’t put money on deposit with a bank above the FDIC-insured rate, NO MATTER HOW ATTRACTIVE THE YIELD. THIS INCLUDES CERTIFICATES OF DEPOSIT!
Understand what your non FDIC-insured money market owns. Get the prospectus; scan the holdings. If you don’t understand, call them and ask questions!
If you want to buy some real estate, get pre-qualified, but understand that things are in flux and promises aren’t worth the paper they are written on.
If you are in the market for real estate, be prepared for a Full Doc loan process.
If you are in the middle of buying and selling houses, have your realtor confirm all the details of the buyers financing directly with the buyers lender.
If you are upside down on a home and your rate just reset higher, call the lender directly as soon as you have problems. They can’t help you as much after you haven’t made a payment for 3 months.

The Fat Lady hasn't sung

In fact, we think she has barely even warmed up her pipes. The problem is, it is like looking for the boogieman. Where is he? He could be anywhere.

So it is with subprime and other non-prime lending. A couple of other places it could pop up are the consumer finance divisions of the major banks, auto loans and credit card companies. It could pop up on your street with a fire-sale price on a foreclosed home. There go your comps.

It is hard to believe that the US consumer, who is in debt up to their eyeballs isn’t going to slow down spending just a little. Even if incomes and jobs stay strong, if consumers choose to save more and spend less (de-leverage) the effect on retail sales and spending is going to be huge.