The 2020 Mortgage Crisis ExplainedApr 01, 2020
What's up guys? This is Graham, so I've been hearing a lot lately about this upcoming
crisis, not to mention almost every news website out there is mentioning it, so let's talk about it and instead of creating some kind of sensational video. with scary music in the background talking about how the
crisiswill be the end of civilization as we know it. I will do my best to objectively explain what the issue is, what is causing this, what this means to you and me and whether or not I think this is going to be a cause for concern and I say this as someone who has almost all of their money invested in real estate and rental properties and using loans and mortgages as leverage to better increase my cash flow so is this something we should all be concerned about or is it just another catchy headline that gets us nowhere but clicking another article once again from The Wall Street Journal well let's look at the investigation and find out and as usual I put a lot of work into these videos to try and give you the best perspective possible so if you don't mind if you appreciate that just destroy the like button because the youtube algorithm says that's a good thing you do if you wouldn't mind it would help my channel tremendously.
Having said that, I really appreciate it. Thank you very much and let's start the video. If you're not familiar, let me explain. what this whole mortgage crisis is about because this is quite different from what happened in 2008 when lenders gave the worst loans imaginable to people who couldn't afford them when they deduplicated the foreclosure and then crashed the whole market this all starts with the trillion dollar stimulus package that was just passed and you know the saying no good deed goes unpunished well I mean in a way that's sort of what happened here this recently passed stimulus package ends d up to provide significant relief to individuals and businesses in need of money funding for hospitals and healthcare workers and just a myriad of other packages, one of which included the Federal Reserve buying up mortgage-backed securities that basically consist of the loans you take out every time you go and buy a house, so think of the word security as just another term for investment and that investment is backed by the houses that they're based on, so mortgage-backed security is basically a way of investing in a bunch of mortgages that are tied to people's houses, banks go and they sell these things to free up some cash and also collect some money up front as a kind of commission for basically going and getting the loan like here it is that works when you go to get a loan from a bank let's say to go and buy a mansion, you go and get that ten million dollar loan, you use it to buy the house and then you pay interest on that loan depending on the terms of the deal, but the bank where you got the loan just doesn't sit there for thirty years charging an interest rate of three and a half percent while you go and pay your magic that it will simply take too long for the bank to earn its money Come back and we'll tie up t All your money, plus banks don't have the cash on hand just to make mortgages every day, every day; small fees associated with their loan, then they wrap it all up carefully and sell it to an investor who holds those mortgages as an investment, that way the bank gets their money back pretty quickly, they've made a little bit of money in the process and someone otherwise, the investor can get a safe and stable return on his money, it seems like a fairly simple and honest operation, but what ended up happening is that during the crisis, the markets fell, uncertainty surrounded us, people did not spend. money and banks were caught in the crossfire.
They had all these loans carefully packaged up waiting to sell them to an investor but the problem was when they went to hand them over to an investor the investors were like no we're not going to buy them right now it's a little too risky in the market so let's go to delay keeping those and yeah we're going to refrain from buying any of those now and now the bank is backed with all these loan applications and loans that they can't sell because there are no investors willing to buy them somehow it's a bit like the bank is constipated they're backed up with all these loans they can't take out and the bank is constipated for lack of a better term that's what i'm trying to say here to get the bank to purge and take this pressure off , what they did was go back to investors and say, okay, investors, what do you think? this whatever loan we do right now we'll just raise the interest rate and that way you can get a higher yield and make it more likely that you'll buy loans and so to get a higher interest rate we're just going to go to all of our borrowers and we're going to say instead of giving you a 3% loan now your loan is 4% and you over there now your loan is 5% and you over there five and a half percent here we go now investors are going to go buy our loans because now they get a higher yield well now that's good for the banks and it's good for the investors but it's a big problem for anyone who is buying a house because now they are paying a slightly higher interest rate higher or they're just not getting the loan at all, then the Federal Reserve saw this and saw that borrowers had to pay above market rate for the loan because they didn't there were investors there to go buy that loan and they said the mortgage industry no problem, no problem at all, we will guarantee all those loans, which in fact it will. buy all those loans for you no problem we will i have lowered the interest rate huh we have so much money we are good you guys are good we are good but not really because this is what happened when you go and apply for a loan mortgage, you do what's called a rate lock on your mortgage, which means you can go and lock in quoted rates a few weeks before you close on your mortgage and that way you know exactly how much you're going to end up paying, but when you put in a rate like this , the bank agrees with you. they will get the promised rate, but the bank doesn't know what the actual rate will be at the time they close on that loan, because banks don't want to lose money if interest rates change at that time. you actually close the loan, the bank will cover their investment by making the opposite bet of what you make, it's like betting on both red and black at the roulette table knowing that if one of those bets loses, you'll most likely go to win on the other one you would write off you throw it out completely and most of the time you will only have the same amount of money you started with so banks do this by cutting mortgage backed securities which means they are betting that the price of those securities is going to go. see if those investments go down in value, which means interest rates are going up, then the lender ends up making money and can use that money to pay for your loss by insuring at a lower interest rate and if that investment goes up value, which means interest rates are going down, so the lender will lose money on that investment, but will benefit from the interest rate difference that you pay, so either way, in this situation, the lender can hedge in terms of any kind of fluctuation in price in any way and that way they don't lose money again, like betting both red and black at that table and then of course hoping it doesn't go to zero or double zero but we'll leave that part though when the Fed steps in and sa Don't worry guys we're going to guarantee all these loans no problem here let's go ahead it makes the ta interest rates go down, which drives up the price of all these mortgage-backed securities and causes the banks to lose a lot of money on their covered short positions, which they bet, of course, that the prices of those mortgage-backed securities are not going to go down normally when something like this happens, a lender could offset all these losses with all the new loans that are going to be made. get with lower interest rates, but where things get interesting is that these bets and hedging are done on margin, which means those losses might have to be paid off on very short notice and things get pretty bad and, like I said, normally a bank would write these losses on paper with all the new loans that come in, but as fewer people apply for new loans to buy houses and more people cancel at the last minute after everything that happened and more people lose their jobs and can't go through with buying their property and not to mention a surge of people trying to refinance their loans for a lower interest rate, banks being left with a bunch of hedged investments on margin with fewer loans to help offset those costs, so the banks have to go and put up more capital to offset those losses, which means less money than e could be lent out to consumers and from there more problems arise when less money goes back into the economy from people like you and me going out and taking out loans but there's also another layer of complexity to all of this a little bit on the subject which we've already been talking about and I've seen a lot of articles lately that address this and that would be the missed mortgage payments portion of this relief package includes a possible mortgage payment forbearance of up to 180 days with another possible extension of an additional hundred and eighty days beyond that, which means that right now if you have a mortgage and our income and ability to repay that loan has been directly affected by illness, it could take a temporary positive of up to one hundred and eighty days or more if you have a federally backed mortgage, which is pretty much the vast majority of loans out there, however, even though you're not making payments on your mortgage If your mortgage servicer or servicer is struggling to pay what you don't pay, they are still legally required to keep the money flowing on these mortgages. backed securities, the same ones that were bought by investors who wanted a safe and stable return, so in a weird way these mortgage servicers are a bit like your mortgage guarantor in that if you don't pay, they still have to pay and that right there. raises another potential issue in that if significant numbers of people default on their mortgage payments, how much money will these servicers lose and how long can they float over a period of time? where maybe a lot of people are defaulting on their mortgages it goes without saying that if everything picks up shortly in a few weeks and the whole economy is back up and running like a month from now it probably won't be a big deal but if this persists for many more months, how bad can it be?
These are my thoughts coming from someone who probably isn't qualified to talk about anything related to this, but I'm going to go and do it and voice my opinion because this is YouTube and this is it. just for entertainment purposes not just investment advice and yes this is what i believe first of all most loans out there are known as conventional conforming loans which means the loan conforms to specific guidelines that they give you a better interest rate making sure you don't borrow too much money and these types of loans are much easier to sell on the secondary market and because they are compliant they meet the guidelines of Freddie Mae and Fannie Mac which are two agencies government-sponsored that buy and sell and otherwise guarantee these mortgages, so in a way, Fannie Mae and Freddie Mac are just saying, "Hey, banks, just give us some loans that meet this criteria.
If they bring us this type of loan, we like it." Those are good investments they are safe for us and we will only buy them so bring us these types of loans anything you find like this don't worry we got you covered and bye bye thank you following those guidelines ensures you have a buyer of the loan it gives them a lot more liquidity and it gives them the ability to go out and issue more loans and you in turn yeah yeah you the one who broke the like button for the youtube algorithm in turn might get a better rate of interest on your loan because you're a safer borrower so I really think for most people all of this really isn't that much of a concern if you already have a house and you already have a mortgage your biggest ch The risk could be that , potentially one day you end up making your mortgage payment to someone else instead of who you're making it to right now and that's it, however where this could affect you is in the short term for anyone lookingto buy. a house or finance your house get a loan or potentially sell your house that's because if you're in the market for a house right now, lenders will probably be much stricter about who they give you a loan to, most likely it's that they're going to want more money, a higher credit score, lower debt to income, not to mention they may want you to pay a slightly higher interest rate because of everything that's going on in this at the moment and also given how much demand there is at this point for really cheap money right now, on the plus side depending on how you look at this this could also mean a lot of the market can't qualify for a loan which means that now you might have less competition when you go to buy a house, but of course we also have t o Recognize that if people lose their jobs, they can't make the payments of their mortgage, they can't get enough relief and they can't have cash flow and the property they bought then only makes sense as an Airbnb vacation rental then we could start to see some foreclosures popping up in the next six to twelve months as that the tide recedes and people fall even further behind on payments if you are in a position to invest your money right now then make sure you get a good deal in the future and if you are selling a house then it might be a bit more difficult to get the sale price of your home not to mention that there may be fewer buyers. out there that would qualify for the loan but I think this is more likely to affect smaller and more vulnerable banks than it will affect you and I directly again this is just my opinion here so please do not comment below and be like but grid you don't know what you're talking about this is the bear market I've been I've been saying in the bear market for ten years and now it's happening and I'm right I don't care about another opinion I don't like not said again, this is just my top five perspective on the current mortgage crisis in my opinion it will be short term and will probably even out in a few months if not sooner not to mention a few days ago Ginnie Mae announced that it would provide short term money for lenders who are having a hard time with margin calls, and at this point, realistically, the Fed seems to be on its way to bailing out anyone who potentially needs it, horrible as it may be.
It's up to me to say it and believe me I don't like saying this but I feel a little bit safer knowing that if something was going to get that bad I feel a little bit sure that the Federal Reserve would step in and just bail out anybody and continue to print money. and we would no longer have the problem because really at this point, what is another 100 or 200 billion dollars as play money for the Federal Reserve? At this point, they flushed that down the toilet every day, so what's a little more? you won't be affected by this specifically, that's not to say you shouldn't have any concerns if you own a rental property and your tenant stops paying or gets sick or loses your job and can't make your mortgage payments in situations like you should absolutely raise it with your lender and see if you can find some forbearance on your mortgage through March and liquidity for lenders.
I have a feeling it won't really make a huge difference to anyone anytime soon as this will most likely be resolved in a few weeks or maybe a few months but hey that's my opinion it's just what I think based on the research I've done and if you come to a different conclusion, please let me know. down in the comments as you guys know i pretty much read them all so if you have a different opinion or if you think this is more or less important you think this is going to get better or worse let me know down in the comments so now At the very least, I hope that gives you more explanation and context of what's been going on, so that the next time you read a headline about the foreclosure crisis you can have a better and deeper understanding of what's going on and how it affects everyone involved so with that being said guys thanks so much for watching.
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