Sub-Prime & Hammond Property Values

Zero money down, interest only loans, teaser rates, CDO's? All of this terminology is code for sub-prime. Legislation, designed to increase home ownership, was twisted in an orgy of profits generated by the FEES collected in connection with the home ownership process, and the bundling of these mortgages called CDO's (collateralized debt obligations) into tradeable securities.

With no benchmark to price these exotic securities, combined with the fact they seldom traded, price discovery was left in the hands of the issuer's. To add fuel to the fire, these securities in turn were used as capital to leverage other investments. As a result, it is estimated that a dollar of actual capital might have supported thirty dollars worth of debt.

It wasn't necessarily even the local bank, a whole "cottage industry", sprang up to meet the demand as first time buyers stepped into the market, while others, "upgraded", or tapped into their equity. As long as borrowers could make their house payments, the chain would remain unbroken and handsome profits would continue to roll in.

As in any bubble, the process had to reach lower and lower to keep the pump primed. In this instance, at the end, people who would never have been considered for a home loan, were getting approved without income verification! Then the storm clouds appeared.

Prior to the Federal Reserve finding "religion", and beginning the current trend of cutting interest rates, they had raised raised rates steadily and consistently for approximately two years. The initial recipients of these sub-prime mortgages, were in the re-set mode after their required two year wait (before they could refinance). The resulting increase in their mortgage payments was a shock to their personal financial situation. Multiply these shocks, by the thousands, if not the tens of thousands nation wide, and then you know how Country Wide Financial ended up staring bankruptcy in the face. Realize also, that the further down the road we go, the worst examples of credit worthiness will be exposed to the reset.

With a low family and household median income, Hammond, no doubt has some percentage (currently unknown) of property owners exposed to sub-prime mortgages. Local government is limited in it's options, but it does have an obligation to consider all of them in attempting to minimize the damage from this problem. Don't be suprised if a Republican proposal is initiated by the freshman councilwoman.