Foolish Friday
Last Friday, we had Jim Cramer blow up on CNBC and this week, it seems like The Donald did his best impersonation of a fool.
Cramer ranted and pleaded with the Fed to lower interest rates to save the world or at least Bear Stearns. It played heavily on YouTube and Charleston's own Stephen Colbert had him on The Colbert Report.
Now we have The Donald pleading with Bernanke to cut rates by a full point immediately. Of course, it was loose monetary policy got us into this mess in the first place. The Fed should provide liquidity to the markets as they and other central banks have done the past 2 days but if they cut rates aggressively as The Donald suggests, the markets would likely be spooked.
On a more positive note, Trump said that if you were having problems paying your loan, don't leave your house at the first notice, but call your lender and negotiate with them. He said you very well might get a better deal than you originally had. Lenders do not want to take your home and be forced to dispose of it.
The fact is that the stock market has been volatile because of uncertainty. No one can figure out the real value of their assets in CDO's (collateralized debt obligations) and MBS (mortgage backed securities). They are not worth zero but they are not worth the original full value either. Write downs of the assets need to be taken and it is the fear of the size of the write downs that is causing some of the panic on Wall Street with every new revelation.
Is every mortgage in America in trouble. No, and it isn't even close. First of all, subprime mortgages make up 14% of the 40+ million mortgages. Only 13% of the subprime mortgages are delinquent so the large majority are still paying every month and some borrowers are working with their lenders to restructure their payments as Trump has suggested.
So we're really talking about less than 1 million mortgages in trouble. Additionally, the real estate assets backing those loans have not gone to zero. Again, not even close. In the most troubled areas of California, Nevada and Florida where the subprime mess is most prevalent, let's say real estate values have declined by 10% or 20%, that still means that there is 80% or 90% of the value of the collateral. Once the real value of the assets can be determined, the real loss should wind up being much less than currently feared.
Jim Cramer and Donald Trump are very smart people and they are not fools. But they have made some foolish statements recently. And I need to get back to writing more about the real estate fools like home sellers who haven't figured out they need to cut their grass in order to make their home look better when it is for sale on the market.
It's more in my realm of expertise. 