Real Estate Crash Translated into Small Talk by Geniusofdespair

You go to a cocktail party and the conversation drifts to real estate and you think to yourself “Bummer, I don’t know beans about this.” You must learn Housing Crash small talk if you want to remain popular. I am here to help by defining some of the most common terms that you can drop to seem knowledgeable and, just maybe, you can even understand what people are talking about. Remember, cocktail parties are teeming with realtors who are suffering financially, anxious to vent.

Statistic to impress: According to the Miami Herald, Miami Dade County has an inventory of 24,316 condos for sale (up 19% from 2007) and 16,446 houses for sale (up 45% from 2007). Sales of both are down close to 50% from January of last year.

In 2007 there were 26,391 foreclosure in Miami Dade County, almost 3 times the 2006 total. In January this year there were 3,434 foreclosures (County Clerk Records). If this trend continues, we will have 41,000 by year's end.

Liar Loans (Very good defintion in the Sunday Miami Herald): “Some borrowers obtained ''stated income'' loans. This is where the customer says what he earns -- but doesn't prove it. A similar product was the ''low doc'' mortgage. Here, people might prove their income but keep other financial details like debt levels to themselves.” This "easy money" was ripe for fraud according to the Miami Herald.

Subprime Mortgages (as defined by Bankrate.com): “Generally, subprime mortgages are for borrowers with credit scores under 620. Credit scores range from about 300 to about 900, with most consumers landing in the 600s and 700s. Someone who is habitually late in paying bills, and especially someone who falls behind on debts by 30 or 60 or 90 days or more, will suffer from a plummeting credit score. If it falls below 620, that consumer is in subprime territory. Few lenders will use the term "subprime" to describe you or your loan, because it's considered bad salesmanship. You might hear the word "non-prime" or, more likely, an adjective won't be used to describe the mortgage at all.” and:

"By 2006, subprime loans were 13 percent of the homelending market, up from 8.5 percent in 2001" (Miami Herald). According to the Federal Reserve of St. Louis, the default rate for these subprime loans is 6 times higher and foreclosures 10 times more frequent.

Subprime Lenders (The Herald says): “They are lenders to people with impaired credit."

“See-Through Condos” - A nickname for mostly unoccupied new condos buildings, where you can see through from one side of the building to the other. Lewis B. Freeman, Certified Fraud Examiner warns: “If you’re the only person closing a unit on the floor, are you going to want to live there? What about the association fees not being paid?"

Hedge Fund (finance and investment encyclopedia): “The term hedge fund is used to indicate a 'hedge' against investment deterioration. Hedge fund can be defined as a managed portfolio that has targeted a specific return goal regardless of market conditions. Hedge funds specialize in gaining maximum returns for minimum risk. Hedge funds use a wide variety of different investing strategies to achieve this goal and generally these strategies are managed and executed by a portfolio manager.”

My Suggestion: When the conversation gets to “Hedge Funds,” if you are not Gimleteye, excuse yourself and go to the bathroom – never to return to that conversation. You are out of your league.

Miami Herald’s Gregg Fields sums up subprime loan problems:

THE OTHER SHOE DROPS

Think about the Titanic. Before it sank, it took on water. Similarly, subprime's problems were papered over for years by rivers of new money. Wall Street sold hundreds of billions of dollars of bonds back by subprime mortgages to investors around the world. So long as new money arrived, the old money looked sound.

In subprime centers like South Florida, these flows of private capital pushed home prices literally out of reach for people living here. Between 2000 and 2006, the median home price more than doubled in Miami-Dade. But household incomes rose just 15 percent.

Higher home prices opened subprime's throttle. Even if a home fell into foreclosure, the lender could sell it without a loss. And continuing low rates from the Fed meant an unending parade of buyers -- at any price.

Worried investors in subprime bonds were reassured by credit agencies, which routinely issued the kind of sparkling ratings not seen since Enron was at its zenith.

''Subprime probably would have never been a problem as long as interest rates were low and housing prices went up,'' said Ken Thomas, the Miami banking analyst. In 2005, as the Fed began raising rates, ``it was like taking away the punch bowl.''

With easy money no longer oiling the industry, the subprime machine began to freeze up. Housing prices stagnated. Buyers disappeared.

''The perfect storm moved in on them,'' said Hancock, the attorney.

Investment houses bloated with subprime debt were out tens of billions of dollars. As the bubble burst, the entire U.S. economy wobbled.

Why had no one seen that the economic emperor was largely unclothed?

''The system evolved beyond natural controls that had existed before,'' said McCain, the Key Bank economist. ``Previously, banks would take applications, and a lot were turned down. But in recent years, the incentives were to pump up the volume on loans.''

Those incentives included billions of dollars in fees for making, packaging and servicing subprime loans. The rewards were too big to ignore.

''People cast a willfully blind eye,'' says McCain.