A New York Mortgae Planners View:

It is Amazing what is happening in the financial markets.

History repeat itself. Well it surely does, but not always exactly the same way, and not always to the same people.

There is a well known proverb that a smart person learns from everyone and everything around him.  By learning from some else's mistakes. He spares the painful ordeal of experiencing it himself.

A Quick look at History

During the great depression, banks where foreclosing houses in record numbers. Taking away the homes of good paying Americans, people who were on time with their bills were stripped of their homes since the banks who where lending the money where short on cash, because investors withdrew all of their money from the banking system due to the stock market crashing and the investors had to pay back money they borrowed to invest. With the banks being out of money they had no choice and they called all  their loans due.

On the news today is Bear Stearns. What's happening now is sort of the same thing that happened in the great Depression. Bear Sterns was in big trouble due to having a lot of exposure to the sub-prime loans that generated great loses. and as investors lost confidence in bear Stearns, that created a run on the bank situation, where investors are rushing to withdraw their money from bear Stearns, only to further exacerbate the liquidity crisis (shortage of cash).

What does this mean to the Consumer

This means that there is going to be a lot less money available to consumers in terms of loans, despite the feds cutting rates. Since money is primarily available to consumers by lenders like bear sterns or Fannie Mae, who get their money from individual investors and not from the government. If investors lose confidence in mortgage back securities, there will be a lot less of it and that means less money for real estate loans even if the fed cut rates. With the fed cutting rates that will be a good infusion and temporary cushion, however not the complete solution.

Action item for this market

Is to realize that the house /equity is not  the best place to keep your money in. First of all, it is  because you are essentially locking your money into an asset where you cannot withdraw it from there only in a lending favorable situation, or in times when there is a credit crunch or liquidity crunch. In times like these when lenders don't have cash, (like Bear Stearns) you are not going to be able to cash out! Even if that means not sending your son to collage, even if that mean money for a liver transplant!

Second reason why equity is not the best place to store cash, is because you are not diversifying your risk. Real estate markets are directly related to the lending and interest rate environment. If it is harder to finance , prices come down. That means keeping your money in a vehicle that might be in a depreciating state when you need it most. But by diversifying your equity instead of paying off one house, you have a better chance of having the money available when you need despite temporary market depreciation.

Lets learn from the lenders who weathered the storm, They weathered it by diversifying their assets. Lehman the close rival and competition to Bear Stearns is well positioned. They have a line of credit of 2 Billion dollars! And they achieved that by diversifying their assets globally, and in many different market unlike Bear Stearns who primarily focused on Mortgage Backed securities in the US.

Action Items in summary,

Do not dump all your money into the house, Instead diversify throughout markets and international markets.

The reasons are

•1.       Because you want to remain liquid regardless of lending landscape

•2.       Because you want to diversify your assets in order to diversify your risk (like Lehman)

There are many more reasons but to start out with these 2 is quite powerful!

Click here for the LA Times Article

Call me if you would like to weather proof your situation .

By the time I was done with proofreading this article, Bear Stearns was already acquired by JP Morgan Chase for pennies on the dollar.