The Tycoon Report

Five Good Things About the Sub Prime Meltdown!

My parents always said that every dark cloud has a silver lining. I was thinking about that after reading several of the recent Tycoon Report articles on the Sub Prime Mortgage Meltdown.

So many people have lost their homes to foreclosure. Others who badly need to sell so they can get on with their lives are stuck in homes they can't sell. Thousands of people in the financial industries have lost their jobs. Thousands of skilled or unskilled workers in the construction industry are either unemployed or underemployed. CEO's of large corporations have been forced to resign. Americans may be facing a recession or worse if things don't improve.

So is there a silver lining to be found among all of these negative events? I think so, and I have put together a list of five good things that have already happened, or will happen as a result of the Sub Prime meltdown. I offer this list as a reminder that one should always maintain a broad perspective on the events, both positive and negative, that shape our lives.

1) The Sub Prime Meltdown (SPM) has lowered interest rates.

Prior to the SPM, interest rates were fairly high, maybe not by historical terms, but certainly in relation to previous years. The lowering of interest rates makes it more affordable for people to borrow money to start a business, buy a car, refinance a higher interest mortgage, and yes, even to buy a house.

2) The SPM will allow new home buyers a chance to buy a home at a reasonable price.

Millions of young adults who wanted to buy a home were priced out of the market by mid 2006. It became far cheaper to rent than to buy at that point. The blow up in the housing market will now allow these people to buy a home without having to take out a risky loan, or stretch their debt load to afford a good home. People with lower mortgage payments will have more funds to save, invest, or spend elsewhere in the economy.

3) The SPM has educated people to be smarter about documents they will sign in the future.

The massive publicity generated by the SPM reinforces the idea that you have to take responsibility for your own financial decisions. That includes reading the fine print on all documents you sign, asking questions when you don't understand the details, and demanding clear answers if they are not forthcoming from whomever is on the other side of the table. That could be a Realtor, Mortgage Loan Officer, Automobile Dealer, Attorney, etc.

In addition, all of the attention to the SPM has created a forum for debate and education on web sites such as The Tycoon Report. This is how people learn and grow, and is certainly a positive.

4) The SPM has put an end, at least for now, to high risk conventional loans.

Mortgage standards have been tightened to the point where people are forced to improve their credit scores, lower their debt ratio, or put some money down, in order to secure financing for a home. Sub Prime loans with two year teaser rates are no longer in the market place. This may be bitter medicine for some, no doubt, but creates a stronger economy and less risk to both bank and homeowner over the long term.

Having said this, I must report that the senate passed the new FHA agreement this week which raises the mortgage limit on FHA loans to $417,000, while lowering the down payment requirement from 3% to 1.5%. I personally think this is a huge mistake, but it is part of the government's plan to offer an alternative to sub prime loans to minority and moderate-income home buyers. When you lower the down payment requirement, you also reduce the commitment that people have to staving off foreclosure by whatever means are necessary. The zero down conventional loan has shown that people with no equity will just as soon walk away from a house as fight to keep it.

5)The SPM will create new opportunities for investors in both real estate and the stock market.

Not all real estate investors are "greedy short term flippers", as many articles and blogs would have you believe. Many of us, myself included, have bought and maintained rental properties for many years. The runaway real estate prices kept investors from being able to buy affordable homes that could be "cash flowed". A reduction in prices and interest rates will spur a return to normal, long term property investing.

The SPM has also created new opportunities for saavy investors in the stock market. Financial, homebuilder, and construction related stocks have been crushed and at some point will offer investors a chance to buy them at bargain prices.

There are many similarities between the SPM and the 2000 tech bubble burst. But just as the tech meltdown offered investors an opportunity to prosper by buying the lows of 2002, so too will the SPM offer opportunities to those with the patience and courage to invest at the lows of 2008.

So remember that every dark cloud, even the Sub Prime Meltdown, has at least one... and possibly several silver linings.