The West’s economies have been the subject of more negative attention over the past six to twelve months than any other time in history. It seems that the number of countries in Europe being affected is growing. This started with Iceland and then moved to Portugal, Greece and Ireland. Now it has spread to Spain, Italy and France. The European Central Bank doesn’t have the resources to assist all of them and the “help” they provide only causes longer-term damage. As in all other industries, who are buying mortgage notes should be concerned about the current situation.
S&P, on the other side of the Atlantic put the dunce cap on Uncle Sam by downgrading U.S. bonds to AA+. This downgrade was a long overdue one, considering the country’s debts are out of control for decades. The past few years have been especially harsh. Timothy Geithner (the Treasury Secretary) criticized S&P, saying that they had “really terrible judgement”. Warren Buffett, who had his own company’s ratings downgraded in S&P ratings, and who also owns a part of a rival ratings agency, spoke out against the downgrade. Due to the potential conflicts of interests for each, I wouldn’t pay much attention.
S&P has further slapped the U.S. with a negative outlook rating and warning that another downgrade could occur in the near future. Congress, as well as past and present administrations, have been the only ones to make a “really horrible judgment”. They have placed the nation in such a fiscal mess that it is impossible for us to pay back our debts in an honourable manner. The U.S. will not default but our leaders won’t make it easy to keep U.S. debt.
Yes, S&P has lost credibility in ignoring sub-prime mortgage issues that first surfaced a few years back. Even in this instance, I believe they should have done so at least one year ago. They did manage to get it right this time, even though they were late.
S&P rightly stated that political fracturing and fiscal problems in the country have prevented any meaningful resolution of the debt problem. Although the debt ceiling resolution will make a small dent in overall debt, it won’t solve any problem. The $2.4 trillion in savings is a slower increase that barely touches the gap that will likely be ten times as large by 2021.
Real estate continues to be hard hit. Low interest rates and more affordable housing have resulted in slow home sales and low values. The government is trying to restrict owner financing and make it harder for homeowners to get a mortgage loan.
The situation is difficult for professionals who buy mortgage notes like me. There are two sides to the story. One, the current situation is good and returns are better than other investments. However, the likelihood of a mortgage debtor ceasing to pay is greater due to a job loss or property value decline. A mortgage note, also known as a real property note, is a long-term investment. We don’t know when the value of the property will drop next week or in ten to 20 years.
My immediate outlook for the economy, and the real-estate market looks bleak. We can only keep our eyes on the news and invest prudently.