HAPPY HOLIDAYS TO ALL

WE'RE TAKING A BREAK UNTIL AFTER THE START OF THE NEW YEAR. UNTIL THEN, HERE ARE SOME RANDOM THOUGHTS THAT ARE VALUABLE YEAR IN AND YEAR OUT. ---The Lord didn't do it all in one day. What makes me think I can? ---To ignore the facts does not change the facts. ---Life is like a roll of toilet paper. The closer it gets to the end, the faster it goes. ---One good turn gets most of the blanket. ---Whatever hits the fan will not get evenly distributed. ---We are all responsible for what we do. (Unless we are celebrities.) ---Artificial intelligence is no match for natural stupidity. ---It takes years to build up trust, and only suspicion---not proof---to destroy it. ---Don't sweat the petty things. And don't pet the sweaty things. ---If you pay peanuts, you get monkeys. ---Nostaligia isn't what it used to be. ---To err is human, but to really foul things up you need a computer. ---If you want to make a small fortune in the stock market, start with a big fortune. ---Life is a sexually transmitted disease. ---Under everyone's hard shell is someone wanting to be appreciated and loved. Best wishes for a healthy and sane new year! The Faculty and Administration of the University of Bob

THE RUPERT AGENDA

No, this is not a crime story by Robert Ludlum. It’s a lot more intricate than that, and it could take years to play out. We may never know who-dunnit. Fact is, we may never even know what the “it” was. This is a story about people and their agendas. Everyone has an agenda, and media people have them in 3D. Financial media people have them in 3D and High Definition. The personal agenda of a financial media person can have an impact on your own financial well-being. Simple examples: Product X is made by a company that you work for, or that you have invested in, or that your company depends on for its business. A print or TV editor with an agenda can downplay or accentuate news about Product X…A radio talk-show host can steer conversations towards or away from a discussion on Issue X….An editorial writer can put Product X in a good or bad light. And so it goes. These agenda activations may be legal or illegal, moral or immoral. They are difficult to spot, and even more difficult to prove. But make no mistake, they exist like oxygen in the air exists. Conflicting agendas are common in all walks of life and in all facets of the financial world. The “market” has its own ways of reconciling conflicting agendas, sooner or later. Just hope you’re on the right side until the conflict is reconciled. Rupert Murdoch has finally closed the deal on his purchase of the Dow Jones Corporation, and its jewel in the crown, The Wall St. Journal, for some $5 billion. Rupert has worldwide media holdings. The London Times and The Fox Network are but two of the higher profile ones. The New York Post and the Daily Sun in the UK are but two of the lower profile ones. The Post thrives on bombast and gossip. The Sun’s claim to fame, aside from having the highest circulation in the UK, is their daily featured photo of topless “page 3” girls. All part of The Rupert Agenda. Rupert’s purchase of the Journal now gives him ownership of one of the pre-eminent financial publications in the world (The Financial Times and The Economist, both published in London, are arguably better.) And how might the Rupert Agenda---pro or con on this or that---affect your own personal financial decisions, for better or for worse? What will The Rupert Agenda be? First, anyone who spends $5 billion on something that may be worth only $3 billion has got to have some fierce agenda to validate his investment. Dow Jones stock had been selling for about $35 a share before Murdoch made his offer of $60 per share. What was he thinking? Murdoch’s track record in other acquisitions has been on the nasty side. One prime example is The London Times. Despite promises that he would leave it editorially intact, he converted one of the world’s finest (though financially bereft) newspapers into a tabloid with a growing emphasis on the old journalistic mantra, “If it bleeds, it leads.” Part of The Rupert Agenda there, without doubt, was to turn red ink into black ink. In his negotiations with the Bancroft family who controlled the voting stock in Dow Jones, he reportedly promised that he and they would work out some committee arrangement which would give the Bancrofts major clout in choosing top brass for the Journal. The Bancrofts wanted Rupert’s money, but not his say in how the paper was to be run. The Rupert Agenda, needless to say, is to control the paper from the very top on down. How long will that committee compromise last? Don’t hold your breath. In a more serious vein, The Rupert Agenda involves more than trying to make a buck on the Journal. He has launched a financial TV network via his Fox holdings. That could combine powerfully with the Journal’s editorial assets. He is known to speak his mind on political issues---sometimes from his own mouth, sometimes as a ventriloquist with his editorial people. The Journal gives him another outlet, one very high on the credibility and integrity scales. News vs. Opinion---Can You Tell the Difference? The Journal has long been known to be excellent at its news gathering and reporting. While its slant is, of course, on business, it covers a wide spectrum of life, and it does so with the highest standards. It gives extensive coverage to consumer concerns, arts and cultural interests, medical and legal issues and much more. As such, it has been a bible for me for 40+ years. On the other hand, its editorial pages are notoriously far on the right edges of our political spectrum. That’s its privilege of course. No one who reads the Journal’s news stories is required to read the editorial pages. Given the new breadth to Rupert’s holdings via the Journal acquisition, The Rupert Agenda might be to play a bigger role in the political arenas. That can be done subtly and effectively by tweaking the editorials and by giving more or less access on the op-ed page to those who favor or disfavor his Agenda, respectively. Old columnists and op-ed contributors fade away, and new ones replace them. Simple enough. Do you suspect that Rupert’s purchase of the Journal was in any way connected to the beginnings of the 2008 elections? Coincidence? Ditto for The Rupert Agenda in the financial world: Certain companies and institutions get better access and positioning to tell their stories on the Journal’s pages, and some get shut out, or shunted to the bottom of page 57. The companies that make up the Dow Jones averages can be changed. Some companies and/or industries get praised in the opinion section, some get hack-sawed. Good earnings announcements can get prominent placement, or minimal. These are all ripple effects of an agenda, and they can all affect investments, employment, profitability and image of virtually any or all American companies. Of course, such agendas have been at work for many years by the departing owners. We won’t know until The Rupert Agenda has taken effect whether it’s better or worse than the departing agendas. But all those who rely on the news and opinions found in the Wall St. Journal must become super-vigilant and somewhat cynical. You owe it to yourself to explore other sources of financial information (realizing as you do that those other sources also have their own agendas), rather than rely solely on the Journal, if that had been your habit. What you used to take as gospel in the Journal you now must take as propaganda, at least until you feel you’ve safely discerned how The Rupert Agenda might affect you. And note well, part of The Rupert Agenda will be to tell you, in as many ways as possible, that you can believe in and trust Rupert’s Agenda. [Full Disclosure---My agenda: I am very concerned that too much media power can reside in too few people, and the public at large is not alert enough to sense the impact of that. The Murdoch takeover of the Journal, coupled with its presumably being blended into the Fox Business Channel, presents a potential danger in slanting business news unfairly. I’ve spent decades in the media---all forms, radio, tv, newspapers, magazines, lecturing---and I shall use my experience and instincts to track The Rupert Agenda and keep you informed of how it can lead you into places you should be avoiding.]

BANKS THAT IGNORE THE MISTAKES OF THE PAST ARE DOOMED TO REPEAT THEM----INTRODUCTION

The three postings after this comprise a three-part series on the chaos in the financial industry, mostly arising out of home loan abuses. They are written in plain English---not the jargon that you usually find in financial articles. It will pay you to become familiar with this mini-history of financial folly, because it will happen again, and if you see it coming you can best protect yourself. The series of articles supplements Chapter 11 in Personal Finance. Access the textbook by clicking on the box in the right column.

BANKS THAT IGNORE THE MISTAKES OF THE PAST ARE DOOMED TO REPEAT THEM----PART ONE

A MINI-HISTORY OF FINANCIAL FOLLY About 25 years ago America’s lenders made such a gigantic industry-wide goof that it took hundreds of billions of U.S. taxpayer dollars to rescue the nation. Most of the boys and girls who are loan officers today were still awaiting puberty then so they wouldn’t remember the trauma that the nation suffered. Give yourself some time to read this three part series. It will help you understand the crazies in our financial markets. Now they’ve gone and done it again. The numbers will differ, and a different group of people will be hurt, but here we have another shocking reminder of how undisciplined the financial industry can be. Let’s review the history, because it will repeat itself yet again, and you’d best keep the lessons thereof in the back of your mind. Going into the 1980s almost all home loans were made by financial institutions: banks and those formerly known as “savings and loans,” or S&Ls. S&Ls were the biggest players. The more deposits the banks and S&Ls could attract, the more home loans they could make. Investors were willing to deposit their money in banks and S&Ls because they knew that up to $10,000 was insured by the U.S. Government (Federal Deposit Insurance Corp. For any amount over $10,000 the depositors relied on the lenders’ expertise in making loans that would be paid off properly. If the lender made bad loans that weren’t paid off properly---uh oh. The depositors would want their money, and the lender wouldn’t have it. . The $10,000 coverage protected most all of the small depositors, but not the big depositors----those with hundreds of thousands, and more, to invest. So those Fat Cats invested their hundreds of billions elsewhere, such as with Uncle Sam himself (U.S. Treasury Bills, Bonds and Notes) or with big corporations (corporate bonds.) Here Comes the Clout Enter the Construction Industry, particularly the Home Builders division. They wanted Congress to increase the amount of deposit insurance so that more people would deposit more money with home loan providers such as S&Ls, so, in turn, more people would buy more houses. Simple enough logic, right? The builders wanted to get their mitts on those billions of dollars that were being invested outside the home loan arena. Bear in mind that the home builders had a lot of clout. In addition to their own companies, a huge chunk of American industry profited from home building: lumber companies, carpenters, brick-layers, electricians, telephone installers, carpet retailers, appliance dealers, and on and on. And lots of those people would vote and make campaign contributions along the same pathways that their money came from. Congress responded to the pressure by increasing the amount of deposit insurance from $10,000 per account to $100,000! Big jump. Now the lenders could be more liberal, lots more liberal, in making loans. The lenders knew that Uncle Sam would step in to protect deposits of up to $100,000, so if some bad loans slipped into their books, not a problem. In those days, $100,000 could buy a pretty fine home in almost all of the country. And the lenders started having a field day. People who otherwise might not have been able to get home loans suddenly found themselves being hustled by the lenders, who now had little worry about making less-than-safe loans. (“If this loan goes bad, no problem. Uncle Sam will make sure the depositors get their money when they want it.”) Loans that otherwise might have been turned down were being made. The lenders were reaping a fortune. And, lo and behold, they found that they could sell a lot of the loans to other investors and keep the loan origination fees for themselves, and let those who bought the loans worry about getting the payments promptly. Getting Sloppy The experienced loan officers---those who knew how to make a safe and proper loan---were swamped by the applications. To speed matters up (and increase the flow of income) the lenders hired loan officers who weren’t sharp enough to know a good loan from a bad one. The lenders said, “Don’t worry if the appraisal of the property isn’t high enough---we can fudge it if we need to.” And “Don’t worry if the borrower’s income isn’t high enough to warrant making the loan.” And “Don’t worry if the borrower’s credit history is spotty. Just get the loans on the books, grab the origination fees, sell the loan to some other hungry investor, and move on to the next deal.” You can guess what was about to happen. And remember---we’re back in the 1980s, not the present day. The next deal, it turned out, was not another home. It was a shopping center. Or an office building. Or an indoor skating rink. Or a fast-food eatery. Or whatever. The big bucks weren’t in houses. One strip-mall shopping center mortgage equals ten home loans, and it doesn’t take that much more work to do a shopping center loan than it does to do one home loan. Or so they thought. Problem was, the lenders were clueless as to how to make safe and proper loans on commercial buildings. Even the ones who were skilled in making good home loans didn’t know the fine points of making good commercial loans. Aside from the basic construction elements, commercial properties required careful analysis of tenants, leases, building and safety regulations, insurance (particularly public liability), and lots more. Greedy borrowers lied to greedy lenders. Greedy appraisers lied to greedy loan committees. Greedy stockholders of the banks and S&Ls looked the other way. And before you could say “Catastrophe!” the whole lending industry was near the edge of going under. A plague of bad loans bankrupted hundreds of lenders, who walked away unscathed and unpunished because the U.S. Government was writing checks to the depositors for up to $100,000 to bail out the lenders by paying off their otherwise defunct deposits.. Pardon me. The taxpayers of the United States were writing checks to cover the otherwise defunct deposits. It cost Mr. and Mrs. America hundreds of billions of dollars to bail out the depositors---many of whom, of course, were themselves. It didn’t cost as much as the Iraq war, but in terms of 1980-90 dollars, it was close. Virtually all of the S&Ls closed. Many of them were absorbed by still healthy banks. Many just fired their employees and shut their doors. It was a debacle of extreme proportions. Ripple effects caused a stock market crash in 1987. The housing market was in turmoil: prices plunged and didn’t recover until the early 1990s. Builders and realtors, and all their employees, were clobbered. Hundreds of thousands of families who had bought homes with mortgages that they really couldn’t afford had to endure foreclosure, eviction and their own bankruptcies. As all of this was happening, news reports told the stories fairly accurately. The storm was clearly visible on the horizon, but nobody, nobody, did anything about it. Not Congress. Not the banking industry. Not the home-building industry. And certainly not the individual families who were buying dream-houses they thought they never could afford. Everyone was too happy with the cash flow. When the storm subsided, everyone, everyone, said, “We can’t let this happen ever again!” And it didn’t. At least not for about 15 years. Tomorrow---Part Two: History Repeats Itself

BANKS THAT IGNORE THE MISTAKES OF THE PAST ARE DOOMED TO REPEAT THEM----PART TWO

A MINI-HISTORY OF FINANCIAL FOLLY, continued Now here we are again in 2007-08 facing the same greedy borrowers, lenders, appraisers, realtors, builders and stockholders. In the 1980s it was called the “Savings and Loan Bailout.” Today, how does “The Sub-prime Mortgage Disaster” sound? DEJA MOO? The script has been rewritten somewhat, but the consequences can be just as traumatic. It’s Deja Moo----I think I’ve heard this bull**** before. This time around, there is no safety net. In a worst case scenario, the housing industry, the financial industry and the tens of millions of people whose jobs depend on them will feel the squeeze. Think of it as a nation-wide Enron: jobs lost, pension evaporated, investments disappeared. The guilty parties in the Savings and Loan Bailout got slaps on their wrists, and were told, “there there, don’t do that again.” “There, there.” What a fearsome punishment. Don’t you just hate it when someone tells you, “there, there.” The bad boys stood in the corners for some years, and as quick as they could devise new twists in the lending game, they were back at their posts. Only this time, unlike the 1980s when their misdeeds were covered by Uncle Sam’s deposit insurance, now they were playing with Real Money. No bail-outs. No cavalry to the rescue. If you messed up---as so many did---you lost your job, your home, your investments. This new 21st Century banking mega-goof involved making bad loans and then selling the IOUs to middleman packagers who bundled lots of loans together in “pools”, then sold the pools to big-time Wall St. investment banks, who then sold big chunks of the pools to mutual funds companies, who finally sold small chunks of the big chunks to…..guess who…..you and your friends and neighbors and relatives and pension funds. Complex? You bet. But let’s put some names on the players and it might help you understand why it’s going to be so complicated and costly to unravel the whole mess. HERE COMES THE GOBBLE-DE-GOOK---BEAR WITH US You’re Boris the Borrower. You want to buy a home, but you have peanuts for a down payment, your credit history stinks and your income is from odd jobs every now and then. Buy a home? Not in this lifetime. Then you see an ad on TV: Ladbroke the Loan Broker is offering home loans to the poor, the hungry, the homeless---and at an interest rate of just one percent per year! A phone call to Ladbroke gets you involved in making an application on the phone. No obligation! You’re an honest fellow, Boris. You tell Ladbroke that you don’t have any money for a down payment. “Not to worry,” says Ladbroke. “And my credit stinks.” “Not to worry.” “And my income is quite irregular.” “Not to worry….go and find a house you want to buy and get back to me.” You shop around and see your dream house: $150,000. The house is owned by Selma the Seller. $150,000 boggles your mind, but then Ladbroke sends Applebaum the Appraiser to drive by the house and give him an appraisal. “$200,000, minimum!” says Applebaum, gratefully folding the hundreds that Ladbroke has slipped him and sliding them into his pocket. “Call me any time.” Ladbroke can’t verify Boris’s income from work, so he just writes “$50,000 per year” on the Income line of the application, and Boris signs off on it. The loan application is approved for $160,000----$10,000 more than the purchase price of $150,000 (“Remember,” Ladbroke tells Boris as he pockets the extra $10,000 as his fee for arranging the loan, “We told you that you didn’t need a down payment.”) Boris pays Selma the $150,000 in cash, and she splits. If by chance Selma took back any IOU from Boris for any part of the price----as is often the case----she has to pray that Boris doesn’t flake out. Ladbroke now owns an IOU from Boris, with the house as collateral, for $160,000, $10,000 of which he has already put into his pocket. Boris is so thrilled he doesn’t read the small print in the loan agreement. And even if he had, he wouldn’t have understood the legal gobble-de-gook. So he glosses over the sentence that says, “The interest rate shall be one percent per year for the first 30 days of the loan, after which it will be adjusted to 14%.” Boris is so happy that his monthly payment will be a slam-dunk $125 (for the first month) that he’s numb to any other data. The standard going interest rate for good quality loans at that time was about 7%. A good loan means that the borrower has good credit and good income, and the house is worth at least 10% to 20% more than the amount owed. Because of all those good qualities, such a loan is known as a Prime Loan. Take away those good qualities and the IOU becomes a “Sub-prime” loan, a name which will live in infamy. Boris settles down in his new house and make his first monthly payment of $125. When he is notified that from the second month onward his payment will be $1,750, he goes into cardiac arrest. THE PLOT THICKENS Meanwhile, Ladbroke has taken Boris’s IOU to Home Sweet Home Financial Corporation (HSH) and offers to sell Boris’s $160,000 IOU to HSH for $160,000. At that same time, Ladbroke also sells HSH another nine iffy loans he has arranged from other borrowers, totaling $1.5 million, and from which Ladbroke has pocketed over $100,000 in origination fees. Why would HSH buy Ladbroke’s loans---including Boris’s? They’re getting a high-interest rate loan on their books and they didn’t have to go through the whole application/ appraisal/ legal/ accounting processes, which would have cost them thousands of dollars. The whole $1.5 milllion package of loans that HSH bought from Ladbroke will generate $210,000 a year of interest once the 14% rate kicks in. If HSH had loaned $1.5 million at the standard rate of 7%, their interest income from that would have been $105,000 per year. So in addition to cutting their expenses, they’ve given a huge boost to their income. Further, as icing on the cake, Ladbroke gives a personal written guarantee that if any of the loans go into default, he, Ladbroke, will buy them back. Sounds good, but what if Ladbroke turns out to be a flake? (Details at 11.) All of this lending activity is fed by a crazy housing market---prices are going up faster than realtors can change their listings, and as the prices go up, so does the rush to buy before prices go up even higher. The extra-easy availability of home loans, in turn, feeds the buying frenzy. Now things get a bit tricky---to say the least. HSH bundles those 10 weak loans, plus a number of stronger ones, into a package they call “a collateralized debenture.” The bad loans are somewhat balanced by the good loans, and the high interest on the bad loans give some extra star-power to the whole package. Because of the bad loans, the package is inherently weak (“…a chain is no stronger than its weakest link…”) but HSH has dressed it up to look like a quality investment. (And let’s not forget Ladbroke’s personal written guarantee, which by now has been written up to sound like a warranty from heaven.) A securities analyst (who doesn’t examine the portfolio as closely as it should, or looks the other way) gives it an A rating---instead of the B or C it deserved---high enough to appeal to big investors. Personal Security and Prosperity Mutual Fund Company (PSP) is just one such big investor. They negotiate with HSH to buy the Ladbroke package for $1.3 million---a $200,000 discount from the face value. Why would HSH part with that collateralized debenture for a $200,000 loss? Two possible reasons: 1) HSH has begun to smell something rotten in the loan portfolio, and they want to get out while the getting is good. And/or 2) interest rates have climbed even higher, and HSH can now invest that $1.3 million at 16% and earn $208,000 per year instead of $182,000 at a 14% return. Plus, when the mortgages eventually are paid in full, they will have taken in the full $1.5 million plus interest. Yes, this higher rate investment is more risky, but to HSH that’s the name of the game. “A turtle never gets ahead until it sticks its neck out.” PSP is now going to blend the HSH debenture into its various mutual fund groups and sell shares to the public. The glowing sales literature for the mutual funds holds out the “hope” that investors will earn 6% per year, which is a good return at that time. PSP will charge investors a 5% up-front loading fee and a 1% per year management fee. An investor who carefully studies the PSP prospectus to see where his money is being invested will see dozens and dozens of stock, bonds and other securities, among which will be an “an A rated collateralized debenture” from HSH in the amount of $1.3million. Looks good. What’s to worry about? BLINDED BY GREED---SO WHAT ELSE IS NEW? This story, and millions like it, represent quintessential greed run amok. Everyone in all these daisy chains of mortgages is counting the profits that they hope to be reaping down the road. And nobody, NOBODY, is paying any attention to the warning signs that something really bad is about to happen. Nobody, NOBODY seems to recall the Savings and Loan Bailout of barely 20 years ago. What now? Now Boris defaults on his loan. Poor guy, he really worked hard to make the payments, but $1,750 per month was beyond his reach. Boris tries to reach Ladbroke, whose number is no longer in service. Boris is evicted, the mortgage is foreclosed and PSP, via HSH, now owns an empty house, which they can’t sell because the whole town is filled with Borises, and there are no buyers, just evictees. Matter of fact, all ten of the loans that HSH bought from Ladbroke are delinquent, and HSH then has to tell PSP that there’s a problem. Word leaks out to the media that PSP has some serious problems in its portfolio, particularly the mortgages that they had bought from HSH. Before you can blink, investors who own PSP shares want to dump them as fast as they can. The shares fall from $10 to $8 to $6. Every month there are reports of more bad loans in the PSP portfolio, and the shares drop even further. CASUALTY COUNT PSP is in trouble.....Banks that have loaned money to PSP are very worried...... Shareholders who own stock in PSP or any of its 24 other mutual funds are worried.....The pension plan manager at your job, who has 10,000 shares of PSP invested for workers’ retirement is worried......HSH has already gone out of business because its credibility has been totally destroyed and 7,563 employees lost their jobs......Ladbroke has moved to Florida where he sells used Saturns at a Tallahassee dealership (Surprise?).....Housing prices in most major American markets fall by about 10%, leaving countless families owing more on their mortgages than their homes were worth.....New home starts drop like a stone, putting tens of thousands of construction workers out of work. Things aren’t much better in the used home market, thus idling thousands of real estate agents across the country.....Banks became super-cautious regarding new home loan applications, so countless would-be home buyers have to look at much tighter credit scrutiny and higher interest rates....Stock prices for lenders and home builders plunge, and investors in general, spooked by the fear of the plunge spreading into other industries, flee the market..... And Boris? He’s back to Square One: Poor, hungry and homeless. This, in a rather large nutshell, is the Sub-Prime Mortgage disaster. Tomorrow: What Does All This Mean to You?

BANKS THAT IGNORE THE MISTAKES OF THE PAST ARE DOOMED TO REPEAT THEM----PART THREE

YOU CAN RUN BUT YOU CAN'T HIDE Now, you may be asking, what does all this have to do with you? --- If you owe money on one of these mortgages---the kind where interest rates can change periodically, upward as well as downward---be prepared for an increase in your monthly payments. Even though interest rates in general might go down around the country, some of these diabolical mortgages have clauses in them that can boost their rates while other rates are going down. If you’re not sure if that is the case with your loan, check with your lender. --- If you’re in the market to buy a home or condo within the next one to three years, be ready for a more-than-tough scrutiny of your credit history, your income and debt situation and the true market value of any house you’re thinking of buying. ---If you’re thinking of investing in any mutual funds, carefully scrutinize how the fund has its money invested. They are not going to advertise that they have an excess of sub-prime mortgages waiting to default. Many of these born-to-be-bad loans are cleverly disguised as well-rated corporate bonds. This is not science fiction. Many big mortgage companies have already gone bust. Many big banks and financial institutions have had to absorb huge losses, some in the billions of dollars. The casualty list includes a lot of foreign banks, making one ask, “How could they have gotten suckered into putting money into complex American scenarios that were far beyond their normal scope of understanding?” They were sold a bill of goods on these sub-prime deals by a band of roving salesmen from the U.S., pitching the deals to all who were gullible and/or greedy. Unraveling the loan packages to determine the ultimate outcome of who gets what may take years to determine. “The Sub-Prime Mortgage Disaster” will be a Chapter Title when the history of the early 21 century is written. As this is written, it’s too early to tell how far the ultimate fallout will reach. Lawyers will have a field day. Remember Ladbroke’s guarantee? These deals were loaded with guarantees and buy-back clauses and recourse positions and other things that the lawyers are so good at making up. Cutting through the jungle will cost more in legal fees than can be recovered. But there will be those who’ll try nonetheless. Of course, one important way that major harm to borrowers can be avoided is if the lenders themselves take a sympathetic approach and work with the borrowers to help ease their payment crunches and facilitate refinancing as and when practical. This will make the banks’ stockholders unhappy. But that’s a relatively small price to pay to keep the markets stable. Will the lenders take such a sympathetic approach? Hard to say. It often costs a bank more to foreclose a property and fix it up for resale than the actual delinquent payments total. In other words, they might well be better off letting the owners of the homes stay there, making whatever payments they can, rather than foreclosing and dumping innumerable houses into an already glutted market. Also, the governments (state and/or federal, wisely and/or unwisely, or any combination thereof) have made moves to regulate interest rate increases, lenders and loan brokers. Many borrowers were conned into signing up for loans that they didn't understand. And there are arguments that borrowers who were greedy enough to falsify facts on their applications shouldn't be given government protection. Only time will tell who gets what protection from whom. And until time tells, you must be careful in shopping for a home loan, and in making any investments that have sub-prime loans (hidden or otherwise) in their portfolios. Stay tuned at this site for updates as they occur, as they can affect you and the economy as a whole.

HOW MANY FORECLOSURES DOES IT TAKE TO MAKE A PANIC?

I haven't seen or heard a news report in weeks (months?) that doesn't blabber on about the shocking number of foreclosures sweeping the nation. Frankly I'm getting quite bored with it all, mainly because it's yet another case where the media's right page doesn't know what the left page is saying. How about adding a dose of common sense to the pot? There they go again, shouting fire in a crowded theater. The more "foreclosure" headlines there are, the more people start foreclosure proceedings. It's a self-fulfilling prophesy, and one that can only bring chaos. Why are there so many more foreclosures this year than there were in 2006 and 2005? Because in 2006 and 2005 people were just getting the loans (many of which were very ill-advised) and they hadn't had enough time to become delinquent on their payments. That's why! The home loan industry was acting like spoiled brats stealing apples from a fruit cart. But instead of stealing apples they were making questionable home loans. The leader gets away with one. Then he comes back with some friends and they get a handful. Then comes a whole gang, and they rip off the whole cart. And they don't get caught until their pile of stolen apples/ bad loans starts to rot, and they are smelled out. Little by little, starting earlier in this decade, some aggressive lenders asserted that they could make loans to people with poor credit histories, and they would prove to be perfectly good debtors, thank you very much. Of course, there are huge numbers of borrowers who always make their payments, even if they have to scrape by and sacrifice. Many of them couldn't buy homes because of their poor credit, and in many cases that was a shame. When Hungry Borrowers Meet Greedy Lenders The aggressive lenders started to pay less and less attention to credit histories and to borrower's income and appraisals. The hungry borrowers were so eager to get the loans that they agreed to pay extra fees and higher rates of interest. And the aggressive lenders were off to the races. They had struck gold, and they mined it furiously. In short order---barely a few years---the aggressive lenders had all but abandoned even the most liberal standards, and they were making loans that were doomed to go bad. As noted earlier, it takes a while for even a shockingly doomed loan to go bad. The first few payments are made on time. Then they start lagging in, and the lenders gives them some extra time. Then the payments become nervously overdue. Then the nasty letters start threatening. Then a few payments are made to catch the borrowers up, and the delaying game starts all over again. It's amazing how two years can whiz by as this dance of doom plays on and on. That brings us to 2007, and the press is roaring about the foreclosures and the bandits who allowed it to happen. Where were these indignant newsies when the manifestly bad lending standards were infused throughout the industry? Why didn't the reporters report the bad stuff then? Could it be because the naughty mortgage lenders were spending a lot of money advertising in those very same media? (Ohhh nooo. That couldn't be. Could it?) The Foreclosure Industry Emboldened by the media coverage, foreclosure mentality swept across the land. People who otherwise would have worked their butts off to make their payments started getting wooed by "mortgage workout specialists" who offered ways to avoid the shame and scorn of being foreclosed---for hefty fees of course. Check out "foreclosures" on a search engine. Today, in a nanosecond there were over 33 million sites listed! Seminars. Books. Refi programs. Counseling. All too many of them scams that would just make things worse for the beleaguered borrowers. People who never would have abandoned their home started hearing how others walked away from big mortgages and, having made little or no down payment, just snubbed their noses at the lenders. So those honest hard-working folks get caught up in the "what have we got to lose" game. The momentum built, and now we're in Foreclosure Hell. The huge pile of bad loans turned rotten. Some of the aggressive lenders have cut back on their hard-charging tactics, but many are still out there pushing the deals of a lifetime. So the storm is yet to subside. The financial markets are in turmoil. Investors are getting burned. Home values in many areas are plunging. Many neighborhoods are blighted by vacant foreclosed homes. Governmental efforts to bail out borrowers will help only a small fraction of the total. Want a happy ending to this sad story? Sorry. Not this time. Maybe in a year. Or two. Or three. Stay tuned.