Mortgage Market Meltdown Casts a Wide Net

    Many people are poo-pooing the mortgage fallout.  Everyone is concentrating on the effects of these subprime loans and how the rate reset will affect scores of people.  You can see my personal feeling on the matter in this post.  Barring that, I am not here to discuss the issue of the mortgage fallout and its impact on the loan holders, originators, etc.  I am here to discuss the further implications of the problem to the Average Joe (or Jane).

    The most recent casualty is American Home Mortgage.  They have been unable to make $300 million in loans on Monday and missed another $500 million they were scheduled to make on Tuesday.  Their stock price has fallen over 90 percent from its 52 week high of $32.77.  the chances are pretty good that this company will either go bankrupt or materially restructure.  Either way it will leave little value to any shareholders.

    You may be considering AHM just another casualty of the subprime meltdown, but they aren't.  American Home Mortgage held a roughly 2.5 percent share of the U.S mortgage market.  They dealt with “Alt-A” mortgages which while not prime, were not subprime either.  These types of mortgages fall in between the two.  These are people with roughly a 600 to 660 FICO score.  We're not talking deadbeats here.  These are people with either a few blemishes on their credit history or are carrying somewhere around a 50 percent debt load.  The people in this range are roughly 40 percent of the United States.

    This cascading effect will affect everyone.  Those who have invested directly or indirectly in mortgage backed securities will lose.   Those who have invested in the companies that originate these loans will lose.  If you have 401k or mutual fund investments, check to see if you will be affected by this financial crisis.  If you are invested in any REIT's real estate prices will be falling.

    Looking further into the issue, many Average Joe’s and Jane’s will be affected as well.  Without originators to make loans to the Alt-A crowd, more homes will sit on the market longer.  Greater inventory with fewer buyers will not be good for the market.  Prices will fall.  People who can get prime loans will be unable to move or get the asking price for their current home.

    As a Real Estate Investor get your money lined up now.  If you have a lot of equity tied up in any properties that you think you would need in the near future you may want to pull it out.  Loan standards will shoot through the roof and some investors may get caught up in the tightening.  Housing prices will be falling.  Look for the deals that are out there and remember the number one rule with investing in real estate.  Make your profit when you buy…..get the property for well below market value.

    As with everything, the Real Estate market is cyclical.  Things will turn around, but I believe that it will go down quite a bit more and many more people will get hurt before it starts getting better. 

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