Monday, August 20, 2007

The Sub Prime Mess or Who's Mortgage Is It?

As an instructor of Economics for 25 years now, many students of mine have asked me to comment on the current problems faced in the Sub Prime Mortgage market. To try to understand what a sub prime mortgage is, we may view it in a variety of ways. First it is a mortgage given to a consumer who may have a poor credit record, not much if any money for a downpayment on a home. Many who may have unreported income (under the table income) may be qualified for this type of mortgage along with those who wish to make a major refinancing by combining all loans into the mortgage (for example $50,000 credit card bills, $200,000 remaining on a mortgage a jumbo mortgage of $250,000-but the house has only been valued for $225,000.). After the mortgage company makes the loan they are then rebundled and resold in the aftermarket usually to a fund or investment firm in many cases in an overseas market.
So what happens now is after paying on a mortgage with 0% interest for one, two or however many years all of the sudden the consumer sees a greater interest rate along with a much higher mortgage payment each month. Property taxes also shoot up. Energy prices shoot up. People lose their jobs. Income in some cases is not even verified. Real estate values have started to decline (in my economic opinion they were overvalued to begin with) and guess what-that home worth $225,000 is now only worth $175,000 and the consumer still owes $250,000 on it.
I think that you may be able to start seeing the problems that are happening. Each segment of the market is starting to blame the other. Economic education was not even thought about in educating consumers whether or not they could realistically afford that mortgage.
Now the problem is how to resolve it. It can only be resolved through the basic laws of supply and demand in both the real estate market and the credit markets. People will lose their homes and mortgage companies will be going out of business, it is the reality of the situation. Political answers such as throwing more money into this market will do nothing to resolve it. If it is too good to be true than it is should be the result of this fiasco. Realtors, mortgage companies and consumers who have signed for these loans all should share the blame. You can also interject the word greed in this equation also. Sub primes will be gone soon enough and logic will return to this market.

Friday, August 03, 2007

Our crumbling highways, oh well!

For many years now I have discussed in my economics classes-where is the tax money going in our state to fund and repair our road and highway system on both a state and federal level? The disaster in Minnesota (which naturally is now a political field day for the Democrats since higher taxes are their answer for everything) sheds light as to the problems we have here in Connecticut with our aging and crumbling highway/road system. The state levies a great deal of taxes of gasoline and diesel in our state, with the money apparently just going into a general fund and then some of those taxes being redistributed through the DOT. Obviously if anyone drives to work one can see first hand how bad our highways are whether it is I-91, 95 or 84 (or how about the storm drain waste of money in Waterbury?). The costs of upkeep are somehow considered in a budget (although how I can't figure it out) and it seems to me a handful of projects on occasion are completed usually after a long period of time and overbudgetted. If one travels I-95 you see the daily mess of the Q-Bridge through East Haven. I can only imagine what a mess it will be when they try to rebuild the Bridge itself.
Is there any solution? Obviously the cry will be greater taxes to rebuild our crumbling infrastructure because there just seems never to be enough money appropriated for the politics of our highway/road system. However, higher taxes will not solve the problem. Maybe here in our state politics could be put aside for a little while and we could force accountability so that we do not see a bridge fall here. Maybe taxpayers and users of our highway/road system deserve better. Maybe state officials could actually do the job they a re paid to do. What a concept.