Robert M. Slutsky Associates
Newsletter
Newsletter15: September 2007
School is back in session. Fall will be here soon. Work hard and appreciate what you have. . . . And read on . . . . .
The Subprime Market Meltdown and How it Affects You:
This is not a real estate newsletter per se but real estate affects us all in some way. For many of us our home is our largest asset and secures our largest individual debt (our mortgage).
Real estate has been a big topic over the last few years. Over the last few years many people's homes in this area have increased more than 10% annually in value, often more. In other hotter markets like Las Vegas, South Florida and parts of California, appreciation of residential real estate has far exceeded those numbers. We all have seen the cable television shows about "Flippers" who buy homes, fix them up and sell them for significant profits. There is also the example of investors buying condos in South Florida (typically Miami and Ft. Lauderdale) and selling them before they were complete. These investor/speculators assisted in inflating the market well beyond historical rates of return on residential real estate. Commercial real estate did not enjoy the boom of residential real estate because most buyers are not purchasing to flip them, are based upon rates of return and have not had the problems people are seeing in residential real estate.
The news over the last 6 weeks has been filled with the Subprime Market Meltdown. People need to understand what this is, what it means and how it affects them. The Subprime market is the public market to purchase subrpime debt. Today most banks and mortgage companies do not keep the loans they originate. Most loans are sold in the securities markets (similar to the stock markets) or to the two largest mortgage buyers, Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are two quasi governmental companies that purchase most of the loans that are extended today. When you get a mortgage preapproval is it likely because the mortgage broker or bank officer has put your social security number, financial information and credit report into a Fannie Mae or Freddie Mac underwriting software package and it gave an "Approve" rating. What this means is that if you can prove to the mortgage company that the information you gave the broker is true (with tax returns, bank statements, etc.) Fannie Mae or Freddie Mac agrees to purchase that loan from the bank or broker.
Because of Fannie Mae and Freddie Mac the United States has the highest rate of home ownership of any country in the world. Fannie Mae and Freddie Mac make the "conventional" mortgage market. These are typically mortgage borrowers that have decent credit and there is a limit of $417,000.00 on the amount of the mortgage. Fannie/Freddie mortgages also require at least 20% down.
There are other mortgages available that make up the non-conventional and subprime markets. Non-conventional mortgages can be too large for Fannie/Freddie or mortgages with unconventional terms (certain types of adjustable mortgages and more esoteric mortgages) for people with either good or bad credit. They can also be the subprime market which is essentially mortgages for people who have poor credit. For these markets investors will buy mortgages that are sold in large groups and turned into securities.
What has happened over the last few months is a repricing of debt in the public markets. Investors suddenly figured out that they were buying securities valued a certain way and that they really had no idea of the true value of the mortgages they were buying. With the prices of homes in some areas dropping 10-30% suddenly the mortgages that were close to or exceeded 100% of the value of the property at the time of the mortgage were now undersecured because the home values had dropped. Essentially investors have woken up and said "we had no idea of how much risk we were taking and we want a higher rate of return for the risk we have taken". What this means is that investors will pay less for loans that have more risk which made the current mortgages in the market less valuable and the market dropped.
This is not a big problem if everyone is paying their mortgages. However, we are in an unusual situation historically. Typically the housing market follows the economy and the financial markets. If employment and the economy are weak people stop buying houses and the market weakens. This usually happens the credit is tightened by the Federal Reserve bank because of inflation and an overheated economy. This is not the case now. For the last several years the economy has exhibited moderate to good growth and moderate inflation. The Federal Reserve Bank did raise short term interest rates but overall rates on mortgages have not risen significantly. Now in the low to mid 6% range mortgage rates are still some of the lowest in the last 40 years. And unemployment is about 4.6%, very low by historical standards.
So what's up? Since 2003 when rates dropped to the lowest ever (and refinances were booming) people starting taking out significant amounts of equity from their homes. Worse than that however, was that many people were taking out adjustable mortgages. They had a lower rate initially but would adjust up based on an index within 1, 3, 5 years. Many people used these mortgages as a way of buying much more home than they could afford. Now many of these mortgages are adjusting and people are unable to refinance because they have become in arrears and their credit has suffered. For the people who had poor credit in the first place, the huge number of lower quality mortgages have started to default because many people who were not good risks were obtaining mortgages when they would not have qualified previously prior to the refinance boom early in the new millennium. Interestingly many people who are now in trouble are fully employed and once had good credit (but apparently were not financially savvy and did not really understand how much they could afford).
Who is to blame? There are many possible culprits. Some say Alan Greenspan, the former Federal Reserve Chairman is one because he let interest rates stay low too long causing the bubble in home prices. The very low mortgage rates that he engineered allowed people to bid up the prices unnaturally on homes (low interest rates means you can afford more house). Some blame the mortgage companies for allowing people to use exotic loans and for selling loans to people they really did not understand. These are all probably part of the problem but personal responsibility must be part of the problem as well. Many people simply had to have that more expensive car or that bigger house that they really could not afford. And, they used their homes as an ATM taking multiple lines of credit or moving because their old house went up in value rather than they needed the extra space (or assumed housing prices would continue to rise forever and that a bigger house would be a great investment).
So what does all of this financial gobbledygook mean? How is this going to affect you? The repricing of these securities knocked the overall financial markets for a loop in July and August. The Dow Jones Industrial Average went from an all time high of 14,000.00 to under 13,000.00 in a matter of weeks (although the market had been strong and is still up a few percent this year). This is still relatively modest by historical standards but the financial markets are sitting up and taking notice that the drop in housing prices has had more of an effect than previously thought and returns on this type of debt will be lower in the future. This has likely dropped the value of your retirement portfolio.
This repricing of risk has noticeably contracted the credit markets. Lower quality borrowers are not getting mortgages, auto loans or credit cards. 2nd mortgages (how many people made up the difference between the Fannie/Freddie 80% first mortgage and the full purchase price) are pretty much dead in the water. Jumbo loans, whose rates used to be about .25% higher in rate than conventional loans are now between .75% to 1.00% higher in rate than conventional loans (even for people with excellent credit).
We are a resilient country and we have a resilient economy. Long term this will all be a blip on the radar. Hopefully it has encouraged people to be a little more conservative about their spending habits and to get more information before purchasing financial products (including mortgages, stocks, bonds, insurance, etc.). And when dealing with financial issues, get some advice from someone who is trustworthy and looking out for your best interests.
If you or someone you know has an adjustable mortgage (and decent credit) they should refinance into a fixed product. Rates are decent right now for conventional mortgages.
In addition to Elder Law, our firm practices real estate law and originates mortgages. Please call us at (610) 940-0650 with any questions or for rate quotes.
Nursing Home Resident Rights:
While residents in nursing homes have no lesser rights than anyone else, the combination of an institutional setting and the disability that put the person in the facility in the first place often results in a loss of dignity and the absence of proper care.
As a result, in 1987 Congress enacted the Nursing Home Reform Law that has since been incorporated into the Medicare and Medicaid regulations. In its broadest terms, it requires that every nursing home resident be given whatever services are necessary to function at the highest level possible. The law gives residents a number of specific rights:
Residents have the right to be free of unnecessary physical or chemical restraints. Vests, hand mitts, seat belts and other physical restraints, and antipsychotic drugs, sedatives, and other chemical restraints are impermissible, except when authorized by a physician, in writing, for a specified and limited period of time.
To assist residents, facilities must inform them of the name, specialty, and means of contacting the physician responsible for the resident's care. Residents have the right to participate in care planning meetings.
When a resident experiences any deterioration in health, or when a physician wishes to change the resident's treatment, the facility must inform the resident, and the resident's physician, legal representative or interested family member.
The resident has the right to gain access to all his or her records within one business day, and a right to copies of those records at a cost that is reasonable in that community. The facility must explain how to examine these records, or how to transfer the authority to obtain records to another person.
The facility must provide a written description of legal rights, explaining state laws regarding living wills, durable powers of attorney for health care and other advance directives, along with the facility's policy on carrying out these directives.
At the time of admission and during the stay, nursing homes must fully inform residents of the services available in the facility, and of related charges. Nursing homes may charge for services and items in addition to the basic daily rate, but only if they already have disclosed which services and items will incur an additional charge, and how much that charge will be.
The resident has a right to privacy, which is a right that extends to all aspects of care, including care for personal needs, visits with family and friends, and communication with others through telephone and mail. Residents thus must have areas for receiving private calls or visitors so that no one may intrude and to preserve the privacy of their roommates
Residents have the right to share a room with a spouse, gather with other residents without staff present, and meet state and local nursing home ombudsperson or any other agency representatives. They may leave the nursing home, or belong to any church or social group. Within the home, residents have a right to manage their own financial affairs, free of any requirement that they deposit personal funds with the facility.
Residents also can get up and go to bed when they choose, eat a variety of snacks outside meal times, decide what to wear, choose activities, and decide how to spend their time. The nursing home must offer a choice at main meals, because individual tastes and needs vary. Residents, not staff, determine their hours of sleep and visits to the bathroom. Residents may self administer medication.
Residents may bring personal possessions to the nursing home such as clothing, furnishings and jewelry. Residents may expect staff to take responsibility for assisting in the protection of items or locating lost items, and should inquire about facility policies for replacing missing items. Residents should expect kind, courteous, and professional behavior from staff. Staff should treat residents like adults.
Nursing home residents may not be moved to a different room, a different nursing home, a hospital, back home or anywhere else without advance notice, an opportunity for appeal and a showing that such a move is in the best interest of the resident or necessary for the health of other nursing home residents.
The resident has a right to be free of interference, coercion, discrimination, and reprisal in exercising his or her rights. Being assertive and identifying problems usually brings good results, and nursing homes have a responsibility not only to assist residents in raising individual concerns, but also to respond promptly to those concerns.
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Robert Slutsky, Esq. has been practicing Elder Law for 14 years. He helps families in Montgomery, Delaware, Philadelphia, Chester and Bucks Counties. Mr. Slutsky has represented local Area Agencies on Aging, long term care facilities and was a member and officer on the CAPS Board of Directors for over 10 years. Home visits are available. You may reach him at (610) 940-0650, robslutsky@comcast.net or the website at www.slutskyelderlaw.com.
DISCLAIMER: The content of this Newsletter is for general information only. It is not intended to be legal, tax, financial, medical or other advice. The reader should obtain legal, tax, medical or other advice from a competent professional to address his or her specific needs. We do not endorse any particular service provider. If a service provider is mentioned in an article it is simply because we may have come across them in our travels and cannot speak to their quality of service or integrity.
