Stock Markets Exposed
Can someone please explain the correlation between credit/mortgage fears and the stock market?
"Major gauges tumble on credit and mortgage market fears; Dow, Nasdaq, S&P 500 all down 10 percent off highs - reaching market correction levels." This was the headline on CNN.com today, and as a person who just bought a house 2 days ago, I would really like to understand what the experts think is happening. How are the two inter-connected, and what it the anticipated outcome of this 'credit crisis?' How does it affect me as a homeowner and as an investor?
Public Comments
- I work for one of the largest (still standing) mortgage banks in the county. I've been in and out of the industry for 10 years. I got out in the last crash in 1998. By the looks of things, it's a lot worse than it was 10 years ago. Right now we are experiencing a "liquidty crisis" on Wall Street. The investors have stopped purchasing loans that us as lenders need to sell. We make money by lending out money as mortgages. We sell these loans to wall street. When they purchase our loans it frees up our capital so we can keep lending it out over and over again. Loans are pooled together with many other loans and securitized into MBS's. (Mortgage backed securities). These are sold to pension funds, hedge funds, and various investors around the world. These were considered safe until someone figured out most of these loans were full of fraud and not performing. The investors are now refusing to purchase these securities from wall street bankers like Leahman brothers, merril lynch, goldman sachs, morgan stanley, etc. In turn they cannot lend us (bank or lender) money. The cycle is interrupted and hence we're in a crisis. People need loans but we are running out of money. We've had to cut back most of programs so many people will not be able to qualify for loans. Many "sub prime" (credit impaired) borrowers took out short term adjustable loans. They loans are now adjusting and defaults are rising. When the loan adjusts most borrowers cannot afford the new payment. They also don' t qualify for any programs so they're stuck in their home facing foreclosure. This is a very serious issue which 99.9% of the public have no clue about. It will most likely launch us into some kind of recession. I expect a market correction of 10-25% in home values over the next 2 years. This seems to general opinion. First of all, if you purchased a "home" it is not an "investment". That is the problem with the market. Everyone bought homes they could not afford on "exotic mortgages". Now the value is no longer increasing and they can't refi out of their current loan. If you plan to live in your home for the next 7-10 years then the market will recover. If you are holding onto some investment property hoping to flip it for money in the coming year then you're in for a rude awakening. Hopefully you locked in a long term ARM (7/10 year fixed) or a 30yr loan. Expected outcome? Of the top 10 banks in the country we'll be left with 5 when it's all over. Countrywide, the largest mortgage lender in the country (lends out more than WAMU and Wells put together) is facing bankruptcy in the next 2-3 months if this is not resolved.
