Inquiring about the financial crisis

by Dan Krell © 2010

If you’re still wondering about the cause of the financial crisis, don’t worry- the Financial Crisis Inquiry Commission (FCIC) is [still] looking into it. The Fraud Enforcement and Recovery Act of 2009 established the FCIC to examine the causes of the financial and economic crisis within the United States and submit its findings to the President on December 15th, 2010. The Commission is comprised of ten congressionally appointed members who are “prominent private citizens with significant experience in banking, market regulation, taxation, finance, economics, housing, and consumer protection.”

The Commission is charged with twenty-two areas of inquiry. Some of those areas that are related to the housing market include: monetary policy and credit; the concept that certain institutions are “too-big-to-fail”; fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector; legal and regulatory structure governing investor and mortgagor protection; financial institution reliance on numerical models (including risk models and credit ratings); the legal and regulatory structure of the United States housing market; lending practices, and securitization (including transferring risk). To do its job, the Commission is given the authority to hold hearings, issue subpoenas, and refer anyone who violated the law (with regard to the financial crisis) to the U.S. or State Attorney General.

Although Last week’s testimony of former Federal Reserve Chairman Alan Greenspan made headlines, not only because of the sometimes seemingly antagonistic questioning and defensive responses, the back and forth garnered the highly publicized “Greenspan sound bites” such as: “congress has amnesia” and “I was right 70% of the time.” As his testimony came to a close, a power outage dimmed the lights and disabled the microphones; which the Chairman of the FCIC attributed to Greenspan’s “lights out performance.”

Throughout his testimony and questioning, Mr. Greenspan cited a string of temporal events that may have led to the crisis, which included: higher affordable housing goals set in 2000; huge accumulations of subprime loans by Fannie Mae and Freddie Mac (to meet the new goals); and the increased European demand for subprime financed Collateralized Debt Obligations (CDO).

According to Mr. Greenspan’s testimony, subprime loans were not a major problem before 2002 because they were a small sector of the market. However, after new affordable housing guidelines were set, the subprime market grew rapidly (which may have also been the cause of rapid appreciation of home prices). He stated that if Fannie Mae and Freddie Mac had not accumulated the huge amounts of subprime loans (the accumulation was a contrast to their intended function); they probably would not have failed. Additionally, those subprime loans were graded “AAA” (rather than subprime) which probably increased the European appetite for the CDO’s (because of the unusual high yields for the grade). Mr. Greenspan differentiated the recent financial crisis from the Great Depression by saying that the recent financial crisis was “the greatest financial crisis” due to short term availability of funds; but the Great Depression was “the greatest economic crisis.”

So far, the FCIC has held two hearings and a forum of academic experts who presented working papers of their research on the causes that led up to the crisis.

Originally published at

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell

Incentives get consumers to buy

by Dan Krell &copy 2009

As “Cash for Clunkers” (C4C) winds down this week it is clear that consumers are pushed off the fence to buy cars when given a financial incentive. Housing’s stimulus, in the form of a first time home buyer tax credit, is said to have been pushing home buyers off of the fence too.

The first time home buyer tax credit was first introduced in the Housing and Economic Recovery Act of 2008. The initial credit allowed first time home buyers, who purchased a primary residence in the United States in 2008, to claim a tax credit up to $7,500 on their 2008 federal tax return that was to be repaid in 15 installments beginning in 2010. First time home buyers must meet specific criteria to qualify for the credit (

The tax credit was extended and expanded to include first time home buyer purchases in 2009. The expanded credit that can be claimed is currently up to $8,000, however does not have to be repaid. Home buyers can claim this credit in several ways. The current first time home buyer credit is set to expire (to qualify, the home must be purchased before December 1st) December 1st, 2009 (

Some housing experts point to recent spikes in home sales as success for the first time home buyer credit. In an August 12th podcast, National Association of Realtors Chief Economist Lawrence Yun stated that there has been “consistent momentum” with the first time homebuyer credit such that there is pressure to expand and extend the program. Comparing the C4C stimulus to the first time home buyer tax credit, Dr. Yun explains that the effects of the C4C on the economy is temporary whereas the effects of the home buyer credits have a longer lasting effect on the economy and real estate market (

As the window to claim the first time home buyer credit is quickly closing, there is strong support to extend and expand the current first time home buyer credit. In a June 10th press release (, Senator Johnny Isakson made a case to expand the current incentive. Senator Isakson stated; “The first-time homebuyer tax credit has made a difference. First-time home buyers used it and the market stabilized, but we don’t have a recession in first-time home buyers. We have a recession in the move-up market…”

Senator Isakson, expressing concern over the inability for “move-up” home buyers to buy and sell homes due to a lack of equity and liquidity, introduced bi-partisan legislation on June 10th. The bill seeks to expand the incentive to home purchases made in 2010, increase the tax credit from $8,000 to $15,000, and eliminate home buyer income caps. Basically, if the legislation passes, any home buyer would be able to claim the credit. Currently, the bill (S.1230) is in committee.

Other bills to extend the tax credit were introduced earlier this year in the House of Representatives. Among them, H.R. 1245 (introduced by Rep. Ken Calvert) also calls for an increase in a home buyer tax credit to $15,000.

It is clear that the current tax credit is effect to motivate first time home buyers to get off the fence. However, some experts state we cannot know the full effect of the incentive until we measure the data.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 24, 2009. Copyright © 2009 Dan Krell

Market stabilization or evidence of a two tier market?

by Dan Krell &copy 2009

A tale of two markets

As signs of economic stabilization are being reported throughout the world, markets begin to show signs of activity. Global housing markets have also reported increased activity and signs of a stabilizing real estate market.

Julia Werdigier recently reported in a recent New York Times article (British Real Estate Market Seems to Be Thawing a Bit, August 4, 2009) that British home prices have increased 1.3% since the beginning of the year. Although this is still quite a difference from the almost 15% slide in UK home prices since 2007, it is sure a welcome statistic as the British expect home prices to end positively.

In China, (August 11, 2009) reported that home prices across seventy Chinese cities increased one percent from the same time last year. Additionally, Chinese home prices have increased for five consecutive months after a six month slide.

Here in the United States, the National Association of Realtors (NAR) recently reported that the number of pending home sales continue to increase (a five month increase). This successive increase is the first since 2003. Signed real estate contracts increased 3.6% in June from May’s Pending Home Sales Index (PHSI) of 91.3 and 6.7% from June 2008’s PHSI of 88.7 (August 4, 2009).

Additionally, the S&P/Case-Shiller Home Price Index ( showed signs of relief of downward pressure; however, home prices are reported to be at 2003 levels. Freddie Mac reported that its Conventional Mortgage Home Price Index (CMHPI) fell 5.3% in the first quarter of 2009 compared to the 18.4% decline in the fourth quarter of 2008.

NAR Chief Economist, Lawrence Yun, was quoted in the NAR press release as attributing increased activity to “historically low mortgage interest rates, affordable home prices and large selection are encouraging buyers who’ve been on the sidelines. Activity has been consistently much stronger for lower priced homes…” Dr. Yun also stated that many first time home buyers are acting to meet the November 30th deadline to qualify for an $8,000 tax credit.

Although the data may seem encouraging, the numbers may be telling the story of an emerging “two tier “market. A two tier market is a description used when prices vary significantly for seemingly similar homes; a closer look reveals that well kept and updated home owner resales fetch a higher price than the poorer condition distressed properties.

Because home owner resales typically peek in spring and summer months, we can expect the number of home owner resale listing to decrease as winter approaches. Combined with another expected wave of home foreclosures (from resetting adjustable rate mortgages and option arms), recent real estate market gains may be temporary.

Even the venerated Alan Greenspan recently warned on the August 2nd airing of “This Week With George Stephanopoulos” ( that there may be a “second wave down” in home prices; stating that the real estate market has stabilized temporarily, and real estate data is very difficult to measure because the data is regional.

Much like last summer’s real estate market blip (where the NAR reported a five month high in home sales for July 2008), we may be headed into another downward winter market. However, any downturn will be temporary and further indication of a two tier market as home owner resales increase next spring and summer.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 10, 2009. Copyright © 2009 Dan Krell.

Risky mortgages

Reading Friday’s Washington Post Article about Alan Greenspan’s comments on the housing market does not surprise me. Mr. Greenspan was concerned about the increase in the use of what was termed “exotic mortgages,” specifically interest only mortgages. In other words, “risky mortgages.”

A lot of media focus has been given to this type of loan lately because the national housing market. Locally, there has been media attention as well. Like me, the Washington Post has recently written about the potential hazards of interest only mortgages. In addition to interest only mortgages, there are many other non-traditional mortgages that are popular as well, which include 100% financing, no-doc loans, balloon notes, option arms, “sub prime” mortgages, and their many variations of each. I will only describe interest only mortgages and 100% financing. You can contact your local mortgage lender for more information regarding all non-traditional mortgage programs.

What some describe as “risky mortgages” are non-traditional mortgages that were designed to increase homeownership and to help those that can qualify for traditional mortgages. However, many more home buyers are looking toward these non-traditional mortgages to help them purchase more expensive homes which they might not otherwise qualify.

What are risky mortgages?

An interest only mortgage is just that, it is a mortgage where the borrower’s monthly payments only go to pay off the interest of the loan. The principal is never paid back until the home is sold or the mortgage is refinanced. There are several varieties of this type of loan but the underlying goal is the same, which is to allow a borrower to have lower mortgage payments. The intent for this program is to lower the mortgage’s impact on the borrower’s cash flow. In reality, however, the borrowers’ cash flow has been increased because of the added debt from the higher priced homes they purchase. Doing so only puts the borrower at a higher risk because the borrower’s cash flow has not been reduced and the mortgage principal never decreases during the life of the loan.

Another popular mortgage program is the no down payment mortgage, or 100% financing. This program helps borrowers who have little cash for down payment and closing costs. The program provides the borrower with a loan that is one hundred percent of the purchase price. Typically, the borrower relies on a long term approach for building equity. However, recently, borrowers have relied on the strong real estate market to grant them short term equity gains.

These are two wonderful mortgage programs, when employed properly help home buyers. The risk in these two programs is paradoxical. What was devised to help home buyers with limited funds and/or cash flow becomes a tremendous burden when the borrower has a financial set back. Because the principal on the loan is either not reduced at all or is reduced marginally within the several years of the loan, the borrower could easily become “upside down” if they fall behind on their mortgage. Added interest and penalties on unpaid amounts quickly add additional thousands of dollars to the overall mortgage. Being upside down is a term used to describe when you owe more than the home is worth.

Again, these mortgage programs are great devices that have helped to increase home ownership across the country. All mortgages are risks, some are riskier than others. Home buyers should understand the risks involved before choosing any mortgage program.

by Dan Krell © 2005