You read that right…

The biggest of the banks are all writing down investments and claiming huge losses. In fact, in the case of some institutions, they have had to go back to the equity markets to raise capital.

TD Bank said it was forced to raise up to $1.4 Billion in new capital to shore up their reserves. This is a very large step (selling a stake in itself) and has made it one of the few institutions in the world to issue common equity given the state of the markets.

RBC said they too would be raising $225 Million, a far more modest amount, by selling recallable preferred shares on the heels of disclosing over $1 Billion in losses on its investments that have depleted its reserves.

Scotiabank also announced that they would be taking a $595 Million dollar after-tax loss due to the turmoil in the financial markets. The charges include $115 Million in trading revenues related to the Lehman Brothers bankruptcy, and $370 million in adjustments to the value of their investments.

So, the big banks are taking losses all over the place. The market is changing, and the mortgage offerings that people will receive will no doubt change as well to account for this. I will be posting a lengthy post tomorrow about how the Canada and US markets differ, and I hope this makes the case that even price-heavy markets such as Vancouver do not have to worry as much as the US.

Looking back at the past, oh, 15 years that i’ve been consciously aware of the banks, finances, and the market, I cannot remember seeing the banks take these steps: even during the massive losses that were incurred in the tech bubble. Change is in the wind and I have no idea where it will take us, but I’m sure that wherever it is, money will remain tight for a very long time.

The bank of canada moved rates more than expected today by lowering its target overnight rate by 0.75% to 1.50%. Usually, this means the banks will follow suit by lowering their prime rate by 0.75%

USUALLY…

Does this mean the banks “have to lower prime rate” by 0.75%.

NO.

There is no legal mechanism that preserves this relationship. The Bank of Canada is not able to force the banks to lower their rates as doing so would be tantamount to forcing the banks to potentially take a loss. Highly unlikely.

The inital reaction was the TD, RBC, Scotia, and several other lenders lowered their prime rate. But, by how much? In EVERY case so far, prime rate at the banks has only fallen 0.50%.

The exact same thing happened the last time the Bank of Canada lowered its prime rate: initially the banks didn’t follow suit. However, competitive pressures (not the Bank of Canada) resulted in them ultimatley all lowering rates to same level as the Bank of Canada.

With the recent declines in trade, real income growth, and consumer confidence, the Bank of Canada no doubt hopes that this move will spur some further consumer spending. With sales this year already higher than last year at retailers (so far) , the lower rates paid by consumers may be working, but lower rates usually take several months to filter down to higher spending, so likely we are seeing the results of prior rate cuts.

With lower rates available in Canada, look for the Canadian dollar to tread lower in coming days. Why? Rates have been falling on fixed rate mortgages (and term deposits) for a few months now. As rates available to investors go lower, the demand for Canadian dollars falls, and therefore, the price falls. The relationship is more complex than this, but this provides a macro look at why we may see a lower dollar in the future.

The Bank of Canada will continue to monitor the economic conditions and will make another planned announcement on January 20th, 2009 when they next meet.

So, I am happy to see rates falling, as this always makes my job as a Mortgage Broker easier and easier. That said, there is a reason that the banks have eliminated discounts off of prime rate in past months: lower profits (or sometimes losses). Most institutions are still at prime + 1% for variable rate mortgages (with a couple at Prime + 0.60%). With the rates falling lower, and therefore their profits, how low can the banks allow the variabler rate mortgage to go?

My asnwer is that clients that have a discounted variable product (whether it is at prime – 0.90% or prime – 0.35%) you should hold tight and NOT convert to fixed until we see an upward bias appear in rates. Currently, rates appear to be poised to fall further. For clients looking at variable rates on a NEW mortgage, you may want to take advantage of some of the low 4.80% fixed 5 year rates that are available. However, you personal situation may make the prime + 0.60% variable an attractive offer. Call me for a free consultation and to determine what is in your best interests at 604-657-6775 as I am a registered mortgage broker and AMP (Accredited Mortgage Professional).

I was listening to the president of CAAMP (Canadian Association of Accredited Mortgage Professionals) today and he was making mention of his take on interest rates, where they are, and where they are going. I thought his comments were quite insightful, while also providing some good advice to callers. However, several points were, again, glossed over, and I think we need to cover them here.

WHERE ARE RATES TODAY:

Here is a list of the BEST rates that I am currently offering:

1 Year                – 4.35%
2 Year                – 5.10%
3 Year                – 4.79%
4 Year                – 4.89%
5 Year                – 4.80%
7 Year                – 6.05%
10 Year              – 6.20%
Variable:
5 Year Closed    – Prime + 0.60% (4.60% Currently)
5 Year OPEN      – Prime + 1.00% (5.00% Currently)
Line of Credit     – Prime + 1.00% (5.00% Currently)
Prime                  – Is Currently 4.00%

Since posting these rates I have taken a plethora of question and emails and I will attempt to address them here…

I have received several emails saying, “Rowan, my bank is offering me an open mortgage at PRIME RATE,” and you are posting prime + 1% on an open. How come?”

The answer: If you are an existing client of a bank (RBC for example) and are trying to renew early, and not take any new money, and keeping the same amortization they MAY offer you this deal as it requires no re-registration with a lawyer (it’s already registered at that rate). I say “may” because I have yet to see one of these offers in writing. For a new client, buying a home, or seeking to refinance, this offer is not being extended.

I also hear the question, “Rowan, why is your 5 year rate so much lower than my bank?”

The answer: My firm chooses to do a lot of business with the top lenders in the country. As we send them hundreds of millions of dollars per year, we get treatment that a single client may not receive. Think of it as financial clout or “mass quantity discounts.” Just the same way that you can buy 1 orange for $0.25 or 100 oranges for $20.00 (just an example). The more business we do with specific lenders, the more efficient we are, and the more they like doing business with us – thus they offer better pricing (rates) than they offer – sometimes better than they even offer through their own branches. The bottom line: it pays to use a broker that is associated with a high volume office.

Another common question is: “Yeah, I know your rates are low, but are they with a reputable bank?”

The answer: Of course! They are with a nationally chartered bank! We don’t deal with unstable, unscrupulous institutions. We deal with all the major lenders out there (and some smaller ones you may or not know) but they are chartered banks that are offering my low rates currently.

Lastly, I hear the question from other BROKERS: “Where are you getting that rate?”

The answer: Unfortunately, I am not willing to divulge this information to other brokers. I have worked hard, and so have the team in my office, to establish our relationships with our lenders. This is what makes us different, better, and a cut above the competition: our relationships. If a client wants to discuss who the lender is, that is fine, but I will not give the “keys to the kingdom” to another broker who is unwilling to do their homework. Sorry. This is the same reason I don’t post which lender has which rate on my website or blog. If you like what you see, please give me a call.

Happy hunting!

A realtor friend of mine gave me an article she read recently on the Vancouver Real Estate market by Jim Rohn. I have no idea where it was published, but it was his, and it is VERY good and accurate describing how Vancouver’s Real Estate Market is a “Buyer’s Market” yet no one is buying. I wanted to reproduce part of it here for your reading pleasure:

A Buyer’s’ Market should be just that – a buyers’ market. It’s not a fence sitting, waiting , loitering, delaying, dawdling, postponing, vacillating, hesitating, wavering, faltering, pausing, foot-shuffling market. It’s a buyers’ market. By its very name it means buyers should be doing one thing and one thing only – buying. So where are the buyers and why aren’t they buying?

The irony of a buyers’ market is that even though the opportunity to buy is high, buyer urgency tends to hit an all-time low. The media becomes excited purveryor of negative news and uninformed advice, and buyers buy it all. Actually, it feels like the only thing they’re buying. Their reluctance is ironic since not so long ago buyers were incredibly excited about buying – and it was a sellers’ market. Prices were escalating and it was perhaps one of the most difficult times to buy value and yet people were buying like there was no tomorrow. Buyers were afraid of losing out by not buying even though the advantage was all to the seller. Now a shift has occured and it’s a true buyers’ market and what happens? Fear is in the driver’s seat but the tables are turned – the fear of paying too much seems to stop most in their tracks and immobilizes them.

I found that this was an EXACT description of the Vancouver Real Estate Market. Buyers are ready, willing, and able to buy, but are so concerned about “getting a deal” that they are ignoring the fact they are sitting on the sidelines in one of the best buying opportunities in the last 8 years. I am seeing East Vancouver homes, with basement suite income of $750 per month, selling below $500,000. Instead of looking at the low carrying costs of real estate versus the high income potential, people are treating their home like it is an investment.

YOUR HOME IS NOT AN INVESTMENT!

By it’s very definition, an investment is something that generates returns or profits and that is it. If you rented a home instead of purchased, you would be throwing money away every month. It would be better to buy a home, and ride it out for the long term despite price fluctuations as, at the very least, you would be paying down the principle and would eventually own something. Those people sitting on the sidelines are building no equity at all.

Many people are acting like their financing options will be the same in 6 months, with lower prices. The truth is that financing DRIVES prices, and if the prices are lower, it is because the financing isn’t there (or is there, but is more expensive – thus making the purchase less attractive). A person who purchased a home 6 months ago with a variable rate mortgage of prime – 0.75% for $500,000 and financed 100% of it would face a payment of $2,078 per month (including all fees). However, that some home, today, would require a down payment of 5% ($25,000 cash up front) and would now have payments in the amount of $2,426 per month for the SAME HOUSE. Nothing about the home is better.

“But prices have fallen 10%!” some smarty pants may cry. Ok, so the house is $450,000. With 5% down that is still $22,500 cash out of pocket as a down payment, and payments will still be $2,184 per month! So, you’d have to find a way to save $22,500 AND pay $106 more per month for a house worth $50,000 LESS!!

Are you better off waiting and buying when prices are falling and the financing market is tighetening up? I don’t think so. There are EXTREME cases of prices falling in markets that are far, far and away ahead of them selves (Las Vegas, Nevada comes to mind…) but Vancouver isn’t one of them. With upstairs rent easily $1,500 and downstairs rend easily $750 per month. That still more than covers your entire mortgage payments. Not surprisingly, if you bought then OR now, the rent essentially covers the mortgage and not much more. That is the sign that prices are in line with cost and value – in my opinion.

I have had many clients bail out of this market in the past month claiming they will wait until spring to see if the market is better. Meanwhile, they are paying $1,500 a month in rent, for 6 months ($9,000) and the payments on the same home they wanted to buy before will likely be HIGHER.

Pay attention to this point: the sticker price isn’t what you need to be worried about – it’s the payment. Payments on homes have risen, so of course the prices will fall. So if payments continue to rise with global instability, does that mean prices will continue to fall? Yes! Of course it does. Does it mean you shouldn’t buy? If you are buyinga home, you should still buy and start paying it off. Vancouver has value that cannot be ignored. If you are a buyer and flipper, then I would stand out of this market as quick returns will likely be unavaiable for a very, very long time.

So there is my opinion. Happy shopping!

There is a lot of talk amongs real estate “investors” and specialists saying that the key to buying real estate at low prices is to find foreclosures, pre-foreclosures, court ordered sales, and other distressed sales.

IS THIS A VIABLE METHOD OF INVESTING IN REAL ESTATE?

This is not an easy answer. The quick answer is NO. Otherwise, everyone would be doing it. The longer answer is “it depends who you know.”

Let’s address a few of the terms that are being tossed around, and see how they apply to the Canadian market.

FORECLOSURE

This is the process whereby a lender takes the property away from an owner if they miss too many payments. Usually, the process is about 6 months long starting with an “Order Nisi” into court and ending with an “Order Absolute” when the property is taken away from the borrower and given to the lender. Usually, it doesn’t get this far, and a “Order for Sale” is given and the lender will usually sell the place (possibly by also taking possession and kicking the people out of the home).

PRE-FORECLOSURE

This is a very misleading term that a lot of experts are telling clients to search out. Clients are being told to see out pre-foreclosure by looking for signs of “distressed sales,” or other terms that describe highly motivated buyers. Pre foreclosures are very, very hard to find without having an “in” in the industry. As a mortgage broker, often dealing with a lot of distressed sales, I cannot tell people about my clients in situations that they are being told to seek out. In other words, any broker telling you about specific foreclosures is often violating the confidentiality of their clients. There ARE cases, where the clients are OK with this (for example, when they want to sell desperately), but in most cases those people being foreclosed on don’t want to sell. They want to keep their home just like anyone else.

So where do you find pre-foreclosures? There are often several lawyers in town that deal with foreclosures, and they MAY be willing to provide you with names and addresses of properties that are nearing foreclosure. Alternatively, a broker (me for example) who deals with a lot of hard financing and hard situations may have some clients that are seeking to get out of the property. With proper written permission, I, or other brokers like me who deal with a lot of difficult financing situations, can provide you with people who are highly motivated sellers. However, dont’ expect this information to be widely available for the public at large. You are going to have to work for it, and it won’t be easy. If it was, EVERYONE WOULD BE DOING IT!

The last way to find pre-foreclosures is to look at what is being heard “in chambers” in the local provincial courts. For example, if you go down to the courts you can see what is being heard that day, and if you see “Royal Bank of Canada vs. John Michaels” (for example) you can be relatively sure it is because the bank is starting an action against Mr. Michaels, and it is usually due to a possible foreclosure beginning. This info is also available online on the provincial court websites (depending on what province you are in). However, it will NOT say “Foreclosure Hearings” conveniently labelled. It will take a bit of deduction and work to figure it out because you are trying to get very private info. Again, if it was easy, EVERYONE WOULD BE DOING IT!

COURT ORDERED SALE

Oftentimes, when there is a first and second mortgage holder, the clients may fall behind on payments to the first mortgage holder (often the larger of the two) and have problems making their payments. This will put the second mortgage holder at a disadvantage, because if the first mortgage holder gets an “Order Absolute” it will wipe out the second mortgage holder’s claim. This usually takes at least 6 months, and is a huge song and a dance from a legal perspective, so it tends to result in interest piling up and further equity being eroded. Now, this is a simplification of the process, but if the second mortgage holder sees their equity being eroded with interest (or a falling market) they can apply to the court for Conduct of Sale granting them the rights to sell the property for a fair price to pay out the first mortgage, and themselves, and ensure they don’t lose money on the deal. In order to be granted this, they usually have to demonstrate that their equity is in jeopardy by way of appraisals or other market valuation techniques accepted by the courts. In a falling market, with interest piling up, they will usually be granted an order for sale unless a massive amount of equity exists.

So, when reading and hearing about “Court Ordered Sales” you are hearing about highly motivated sellers. However, don’t expect to waltze in and pay pennies on the dollar. The court still overseas the sale price, and makes sure that the price that is received is fair market value. For this reason, just the fact that someting is a court ordered sale doesn’t automatically make it a “deal.” You still have to do your homework and find a motivated seller through the methods I list in the section above regarding pre-foreclosures.

SUMMARY

The process of seeking our foreclosure and “pre-foreclosures” is not a cut and dry issue whereby you can simply find someone willing to give you a “list.” It takes effort, ingenuity, or industry contacts to track them down, and even then, they might not be a great deal. You still need to look at the direction of the market, the cost of the property, and whether or not it is highly marketable in order to discover how good the purchase really is.

Remember, if it was super easy, EVERYONE WOULD BE DOING IT!

The Bank of Canada anounced today that they are reducing their key lending rate from 2.50% to 2.25% which is a 0.25% reduction in line with market expectations. However, many people were calling for a large decrease equal to 0.50% (also referred to as 50 basis points). So the big question on everyone’s mind is:

Will the major banks follow the Bank of Canada and lower their prime rate?

This is a very tough thing to comment on, but I will give you my gut feelings on this. Let’s first look at the comment released by TD Canada Trust at about 10am this morning:

“There has not been any update at this point if TD will reduce their prime rate further to reflect this latest decrease.”

Talk about sitting on the fence wondering what the other banks will do! The reality is that the cost that banks face to raise money has been rising dramatically, and if they reduce their prime rate it cuts directly into their profits. In the cases of some banks, who are already losing money on variable rate mortgages, this further cut simply cuts deeper into their already bleak profit margins.

I am going to reproduce for you, the comments from the Bank of Canada that came out with the announcement:

“In the face of diminished inflationary pressures, the Bank of Canada lowered its policy interest rate by 50 basis points on 8 October, acting in concert with other major central banks. This extraordinary move, combined with today’s announcement, brings the cumulative reduction in our target for the overnight rate to 75 basis points since the Bank’s last fixed announcement date. These actions provide timely and significant support to the Canadian economy. The cumulative reduction in the Bank’s policy rate since last December is now 225 basis points.

In line with the new outlook, some further monetary stimulus will likely be required to achieve the 2 per cent inflation target over the medium term. The evolution of the financial crisis, its impact on the global economy and the timing of the effects of the various extraordinary measures being taken to address it pose significant risks to the projection on both the upside and the downside.”

So, in light of these comments, I think we can safely say that further rate cuts are in store for us. However, this brings us to the next very difficult question:

Will the rate reduction filter down to the mortgage market?

Historically, and in my experience, moves in prime rate have very little to do with FIXED rates. Oftentimes, there is a couple week lag between the time prime rate comes down to the time that fixed rates also go down… IF they go down. They don’t always go down because fixed rates are not pegged to prime rate. However, when prime goes down, a lot of other rates also go down (for example, bond rates), and this usually drags fixed rates with them.

Variable mortgages are a different monster altogether. While prime rate has been falling, the banks have been changing the discount to NEW variable rate mortgage holders. For example, 6 months ago I was doing prime – 0.75% mortgages (would place you at 3.5% today!!!) but now the lenders are prime + 1.5% which puts you at 5.50% (not surprisingly, nearly the EXACT same as the fixed 5 year rate).

So while the prime rate has been falling, and offering savings to people with EXISTING variable rate mortgages, any new variable rate mortgage applicants will face a higher rate.

So what is the net effect?

With variable rate savings no longer available to new home owners, I suspect we are going to continue seeing more and more price rollbacks as the affordability is being reduced by the banks changing the discounts on variable rate mortgages to Prime + 1.5%

Let me give you a concrete example to see how this will be very costly to a home buyer in Vancouver.

If a person bought a $600,000 home (well below the Vancouver average, by the way) and put $120,000 down, this would leave them with a mortgage of $480,000. Assume prime rate is 4.25%.

If the got a prime – 0.75% mortgage 6 months ago (and they will get the same discount for 5 years) their payments on a 35 year mortgage would be $1,977 per month.

If they got the home today, and had to take a prime + 1.5% variable, they will face a payment of $2,636 per month.

LOOK AT THAT! Why isn’t the media reporting on this!!!

The same house, purchased for the same price, in the same market, BUT with current rates costs $659 more per month today!!!

I’m going to close this entry today with the following comment:

When the average family cannot buy the average home, there is trouble ahead.

There has been a lot of coverage on the news recently about “Main Street” and “Wall Street” and what each means, but I’ve never heard them define what those terms mean. In today’s post we’ll cover this little tidbit of info and explain how the media is using the term.

“WALL STREET” is referring to the investors, investment houses, and investment banks that put money (often their clients’ money) into certain invesments. When you hear a news reporter say, “there was a lot of pain felt on Wall Street today,” they are referring to the major investment banks and investment houses suffering losses. The name “Wall Street” comes from many historical references, but it is the location of the NYSE (New York Stock Exchange) as well as the name given to the financial district in New York.

“MAIN STREET” is referring to all the citizens of the US. When you hear a news report say, “the pain felt on Wall Street might not filter down to Main Street for quite a while yet,” you are hearing them say that the pain felt by the investment banks might not be felt by you and me for a while yet.

So essentially, Wall Street is the investment banks and financial companies, whereas Main Street is the “everyman” in the United States.

In the context of the US Sub Prime meltdown that is still occuring, these terms are often used on the news with little or no explanation of where they come from.

Now you know!

So I haven’t posted in over a week, and it’s been because i’ve had my head down working like a dog while reeling from the effects of the last week’s meltdown in the financial sector. Finally, after an up and down week, and Fed in the US approved the bailout. You would think that this is great news for the real estate industry, right?

I’m not so sure. What this plan effectively did is nationalize a private problem. There is a saying somewhere that when profits are made they are private, but when losses are taken, they’re public. I know that isn’t a direct quote, but it is close enough to get the gist of it. It is also very very true. So long as the market continued along unabated, with profits being made, private investors got to keep all their profits, spend it as they wished, and not have to pay anything other than taxes. When the problems set in, and the investors all stood to lose a lot of money, enter the Fed and a massive public bailout that effectively increases the national debt that took them over 100 years to build by 10% in a single blow. I don’t like the precedent that this sets, and hope that the bailout doesn’t totally bail out all the lenders and institutions that acted irresponsibly over the past 8 years. That said, I also don’t want the market to go into a tailspin and melt down.

A lot of the price appreciation we have seen in Vancouver Real Estate in the past few years is driven by the market being very desirable to live in, own in, and even rent in. As a result, prices have (and should have) risen. However, as someone on the front lines of mortgages and real estate, I DO think that prices have gotten ahead of value, and we are in for a correction.

Unlike the United States market, however, I do NOT think that prices will come crashing down around us. Our lenders up in Canada, (yes, even those based out of the US) were more conservative than there brethren in the US and required a borrower to have more than a pulse and sufficient body temperature to warrant getting approved for a mortgage.

Did we have true sub-prime lending in Canada? Yes, but only at a few lenders, and always at no more than 95% financing with most preferring to remain at less than 80% financing even on rock-solid properties. The US actually had lenders lending (in some rare cases) up to 125% of the purchase price with the hopes that property prices would continue to rise and put the clients back “into the black” in a few short years. While this strategy allowed clients to roll all their other debts into their mortgage as well, it only worked while prices continued their meteoric rise upwards. When they started to roll back, that was the end for those lenders (and insurers who insured the mortgages).

So where are we going from here? I met with a few other brokers over the weekend and we chatted about where the market is as well as some of the large pull backs in prices we have seen recently. Most of us agree that prices are likely still going to continue downwards for a while, and the fact that money is still getting tighter and tighter and guidelines more and more restricted will only compound this issue in the near future. CMHC is slated to release some new guidelines any time soon, and I suspect that their “Self Employed Simplified” program will disappear or reappear in a far more conservative form. This could make it far more difficult for self employed borrowers who show no income to get qualified. Given the very high percentage of self employed borrowers in BC, this will have a disastrous effect on real estate prices if we are correct. I hope that we aren’t.

So, if prices continue to decline, should you still buy?

The answer depends on your plans:

1. If you intend to buy and hold it for 5 years or more, then yes you should still consider purchasing rather than renting.

2. If you are buying an investment property, I would likely shy away from the Vancouver market in the next year.

3. If you are intending to flip the property, DO NOT get into this market. I have many, many buy-and-flip investors who have purchased properties, poured $100K into them, and cannot sell them for their original purchase price at this point. Buy and flip is not shrewd in this market unless you are buying at a substantial discount and putting essentially no capital into it.

The bottom line is that if you are buying a home, long term, you should always get into the market, buy as much house as you can afford, and let history, scarcity, and payments do the rest for you. You will always come out ahead, and I defy anyone to prove a 10 year period in Canadian history where if you purchased you would have been better off to have rented. That period doesn’t exist, and for that reason, buying property in Vancouver is still a good LONG TERM investment.

Happy hunting!

After last week, many people have commented that the sub prime issue is finally solved. The government has created an absolute boatload of debt, and it appears to have been taken in stride by everyone. However, let’s look at what actually happened.

So on Monday this week, after everyone had a weekend to think about how the government is going to raise this $1,000,000,000 in cash, they realize that it will come at the taxpayer’s expense. No surprise to those that read my daily column, but nonetheless, the industry “experts” were a little worried. Not surprisingly, the markets took a tumble yesterday.

The total US debt is approximately $9.5 Trillion dollars. In the past week, the government has made plans to increase this amount by approximately 10%. So in the last 200 years of existence, they have wracked up $9.5 Trillion in debt, and in one week, have committed to spending another $1 Trillion or 10% approximately.

There is a lot of talk that the US debt will be downgraded from AAA to AA and this could have the effect of increasing their carrying cost of debt by a HUGE amount (billions annually).

There is also a lot of people ignoring the fact that there is a huge amount ($1 Trillion approx) of sub prime paper in Alt-A mortgages (stated income) that will face a rate reset or renewal trouble, and this could result in up to 60% of the mortgages going bad or being unable to renew and this could serve to deepen the crisis.

Sadly, in my opinion, we are a LONG way from the end of this crisis. How long? It’s anyone’s guess, though I Would suspect a 2-5 year time horizon before the real estate market is back in equilibrium…

An interesting point was raised by a colleague of mind: the US is the capitalist centre of the world when money is being made, but when losses begin to occur they change to a nearly-fascist or welfare state. They have criticized many countries in the past (Japan for example) and have said they should just let the bad companies go bankrupt. Now that shoe is on the other foot, and the bailouts and government intervention is coming fast and furious. Profits are a private matter, apparently, but losses appear to be a public issue.

I, for one, disagree with this policy, but then again I am just a mortgage broker with his opinion on a blog.

Until tomorrow…

This last week has been perhaps the most harrowing in the financial industry that I have been around to see. The week came out of the gates with the 4th largest investment bank in the US (Lehman Brothers) going down after several failed buyout packages. Subsequently, when it appeared that Merrill Lynch was on it’s way out the door as well, the governement stepped in and bailed the out in an effort to restore confidence. However, the battered and bruised economy wasn’t done! Within hours it appears that many other investment banks, brokerages, and financial institutions were going down the bankrupcty road as well. AIG, one of the largest mortgage insurers in the country then gets a government bailout for $85 Billion dollars leaving many people shaking their head and asking, “why not Lehman Brothers?”

It appears the government is picking and choosing who will be left standing, and this does little for investor confidence. I came upon two graphs on the net today. Here is the first, and it shows in a graphical sense, the money the government has “printed off” to try and print their way out of this pending disaster.

The second chart is a visual representation of the losses taken by the major financial banks in the sub-prime crises. Remember, these are actual dollars that are lost. These numbers are staggering in their size, and the companies that lost the most stand out glaringly.

On the heels of all this news, the government has started issuing a guarantee for mutual funds as people are cashing out of them in a dangerously fast pace as they try to save their capital. The funds are guaranteed for one year, and in my opinion this is silly logic.

My point: EVENTUALLY, SOMEONE HAS TO PAY FOR THIS PROBLEM!

As I have said in earlier posts on this blog, those that pay will either be Government (you and me), Investors (you and me) or homeowners (you and me). You can see the trend here. We, the public, will ultimately pay for this. The only alternative is that the government buys and prints their way out of the problem, and from an economic standpoint this should totally devalue the US dollar and destroy confidence in it as a medium of trade if the government can just fabricate more of it in a fiat-economy sense. I strongly dislike it when government steps into the way of the market and tries to bail everyone out.

Please do not think that I am just saying this of Americans. The filtration effect that we see in Canada and mortgages in particular is a tightening of the monetary supply and availability of credit. This results in fewer buyers, and fewer buyers translates into lower real estate prices. As a home owner, I recognize that I am going to lose a lot of money, but I also enjoyed the ride up. What the government is doing is trying to give people the fun ride up, without the downside. Long term, this isn’t possible, and a financial reckoning is eventually going to happen to us. I hope it isn’t as harsh and hard a landing as I suspect, but eventually the piper has to get paid.