Donald Rumsfeld and the Credit Crisis?

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The Unknown
As we know,
There are known knowns.
There are things we know we know. We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don’t know
We don’t know. —Feb. 12, 2002, Donald Rumsfeld, Secretary of Defense in a Department of Defense news briefing

There are known knowns. What do we know about the credit crunch?

We know that a lot of the mortgages and home equity loans that were done with underwriting guidelines that frankly didn’t work. Underwriting guidelines are meant to determine which borrowers will have the likelihood of repaying the loans. Many of those loans have gone bad.
We know that there was a lot of fraud happening in the mortgage business. Much of it was outright fraud, much of it was, as Chris alluded to, not the black and white kind of fraud, but the “gray” misstated income type of fraud. Like the guy working at McDonalds who makes $20,000 a month? Yeah right…..
We know that virtually every bank and financial institution in town has lost a sizable sum of money (but of different sizes) because of this credit crisis. How much each one lost or is going to lose depends on how conservative their underwriting guidelines were.
We know that many people bought more of a house than they should have because underwriting guidelines were too lax and credit was too cheap.
We know that many of those people are going to lose a lot of money, if they haven’t already.
We know that many people took out mortgages that they didn’t understand and all they were concerned about was, “how much is my payment?” Then when their option arm started adjusting, they were in trouble, big trouble.
We know that the financial institutions on Wall Street took mortgages and made then into a very complex very highly leveraged house of cards that is in the process of collapsing.
We know that there are a lot more zeroes in this world than we thought. (As in all of the zeroes following the losses and writedowns that the firms have taken).
We know that the days of very easy credit caused housing prices in many areas to rise to literally unsustainable levels, rising much faster than the income levels were rising.
We know that now that the credit bubble is bursting, housing prices are going to adjust back to more affordable levels.
We know that former Fed Chairman Greenspan (a.k.a. Maestro) who once had an impeccable reputation as a wise man now has to wait for history to be the judge.

There are known unknowns. Things that we know we don’t know about the credit crisis. We don’t know:

Will Countrywide survive?
Will Washington Mutual survive?
Will Bank of America buy Countrywide?
Will Citibank survive it’s financial mistakes in it’s present form?
How many “big” bank mergers will we see this year?
How low will the Fed go in an effort to save the banking industry?
How far into this ball game are we?
How long is it going to take Countrywide to liquidate the over 15,000 homes that it currently owns?
How many homeowners, when they find out they are underwater on their homes, are going to do the “jingle mail”and give up on their homes?
What effect are all of the ARM resets that are coming going to have on the real estate and mortgage markets?
How many changes will Fannie Mae and Freddie Mac put in place and what will that do to the real estate markets?
How many mortgage lenders and Realtors will be gainfully employed in other lines of work by the end of this year?
Will consumers start asking more questions and reading mortgage documents more carefully?
Will consumers start looking at mortgage companies differently than they look at banks? Will they want to work with banks for their mortgage needs more than they will mortgage companies? Will banks continue to want to buy mortgages from brokers as much as they have before?
Will the government proposals make things better or worse?
How big of an impact will this mess have on the 2008 Presidential elections?
How many more losses are buried on the books of the financial institutions in our country and the others who bought mortgage backed securities?

There are unknown unknowns. There are things we don’t know we don’t know about the credit crisis. Since we don’t know we don’t know them, it’s purely hypothetical guestimations about some of the things we don’t know we don’t know…..

Will the Chinese and other foreign countries stop buying our debt?
How far will the crisis that started as a “subprime” crisis spread?
What effect will oil prices have on the credit crunch?
What will happen with Iran and Iraq?
Will there be any notable bank failures?

So, in light of all of the known things, the known unknowns, and the unknown unknowns, what should one do? It would seem that paralysis would be the operative word for the day (don’t do anything). On the contrary, I think that today’s market is a good one to take part in, but with the following items of “advice:”

Make sure you work with experienced professionals who you can trust. By experienced, I would recommend that they be people who have been in the business for longer than 5 years. It would really be helpful to work with people who have been through not only rising markets (like the last five years) but also tougher markets. Oh, by the way, it’s 20 years this year for me.
Read all of the documentation on everything before you sign anything.
Fixed rates for everything except for maybe a 10% second mortgage.
Get recommendations on who to work with from those you trust.
Do your research and become an expert.

2008 is going to be a challenging year in the real estate and mortgage markets. I’m looking forward to helping many people navigate the challenges, the ups and downs, and the difficulties of a transitioning market like this.

So what do you think?