Downgraded U.S Credit:
Why the American Dream of Home Ownership is About to Become a Nightmare
By Sherman Toppin, Esq.
It’s like a financial horror film that keeps getting scarier. In the first quarter of 2007, U.S. financial markets crashed due to subprime and other loosy-goosy bank lending behaviors. A widespread foreclosure epidemic with no immediate cure left dead mortgages lying everywhere. But before the victims can all be found and buried, a second wave of carnage is about to be unleashed because of the recent U.S. credit downgrade from AAA to AA+.
Let’s be honest, AAA to AA+ still looks like a good credit rating to the average person. So why is loping off of the last “A” so problematic? After all, AA+ is still 9 places above the bottom credit ranking of “D.” What’s so frightening about this?
According to financial experts, even a small downgrade in credit rating is a huge problem. This is because a credit downgrade is interpreted as a downward trend in credit, which results in lower profits and potential losses for stock investors, who use credit ratings to make their investment decisions.
Now, before you conclude that this is all esoteric paranoid histrionics projected by analytical talking heads, just ask Fannie Mae and Freddie Mac how they’re doing. The one-degree credit downgrade has already produced alarm in the form of immediate short-term losses in U.S.-backed stocks and has projected even more long-term losses. This is also why the stock market fell over six hundred (that’s right, 600) points within days of the downgrade. The reason for the harsh reaction is simple: stocks are valued based on their short and long-term potentials. The downgrade has comprised the potential of U.S.–backed stocks.
How far will the damage spread? There’s the old adage about running around like a chicken with its head cut off. Well, eventually the chicken stops moving about helter-skelter and collapses dead, headless. Grimly picturesque, but this is the very consequence that I predict we’ll be seeing by 2012 as the result from the U.S. credit downgrading. And as consequences go, this one will affect the real estate market on a nationwide level.
Here’s what it will look like:
1. Downgraded U.S. credit will cause stock investors to divest, or sell off, U.S.-backed stocks (like Fannie Mae and Freddie Mac), and those entities in turn will have less money to buy mortgages. (This has already started to happen.)
2. Since Fannie and Freddie will have less money, they will buy fewer mortgages on the secondary market from banks around the country. When Fannie and Freddie do buy mortgages, they will eventually only buy the safest and best-documented mortgages (i.e., A-paper), which currently accounts for only a small fraction of the consumer lending that occurs.
3. Banks will discover that secondary market mortgage purchasers, like Fannie and Freddie, will only buy the safest and best-documented mortgages. As such, their lending guidelines will fall in line, becoming more stringent, rigid, less-risky and conservative. The will lead to the altogether depressing result of . . .
4. Fewer individuals and families will qualify for residential mortgages. If that’s not bad enough, interest rates will have nowhere to go but up, which, not surprisingly, tends to deter consumers from pursuing a mortgage.
So, fast-forward to 2012 and what will we see? The lowest number of real estate transactions occurring throughout the country because so many buyers will not be able to qualify for a traditional bank mortgage. In almost every region, the transaction pie will be so small that only a handful of real estate professionals and related companies will be able to withstand the famine, while fighting each other for slivers of commissions and fees from the shrunken industry. The truly ironic part is that in 2012, due to the continuing foreclosure crisis, will see a massive oversupply of available homes for sale from private individuals, bank REO departments and HUD at record low prices.
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Total # of families unable to obtain a mortgage
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Total # of families losing their homes through mortgage foreclosures
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The fall of traditional home ownership
in the United States
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If you add the number of families unable to obtain a mortgage to the total number of families losing their homes through mortgage foreclosure, it equates to the fall of traditional home ownership in the United States. This is the dark reality brimming on the horizon of our great nation.
Is there any solution to our predicament? Well, maybe. One solution to our current predicament is the creation of a “rent-to-own” mortgage product that will still function as an assignable, transferable, asset-based security interest. The bad news is no such mortgage model exists at this time because it is so risky. Nevertheless, out of sheer necessity, more creative and risky mortgage products will eventually have to emerge from the financial sector in response to our ongoing national fiscal crisis. Something will have to give if we are to survive this financial quagmire. If we do nothing and remain on our current course, we may become a nation where only the government, banks, corporations and a small number of private citizens will own property.
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