Buying mortgage notes as U.S. credit rating slip sliding away

Over the past 6-12 months, the economies of the West have received more negative attention and experienced more issues than at nearly time in history.  The countries being hit in Europe just keep getting bigger, as it started with Iceland, then went to Portugal, Greece, and Ireland, and now is affecting Spain, Italy, and even France.  The European Central Bank does not have the funds to help all of them, and the “help” that they have provided just causes more long term damage.  Anyone buying mortgage notes, as in most other industries, has to be nervous about the current state of affairs.

Back on this side of the Atlantic, S&P put the dunce cap squarely on the head of Uncle Sam by downgrading U.S. debt to AA+.    In my view, this downgrade was long overdue, as the country’s debts have been out of control for decades, with the past few years having been particularly harsh.  Timothy Geithner, the Treasury Secretary, criticized S&P by stating that they had shown “really terrible judgment”, and Warren Buffett, whose own company had it ratings downgraded by S&P and who owns part of a competing ratings agency, also spoke out against the downgrade.  Given the potential conflicts of interest for each, I would not pay much attention to them.

S&P further spanked the U.S. by putting the rating on negative outlook and warning that a further downgrade could happen in the near future.  The only “really terrible judgment” has been that of Congress and current and past administrations.  They have put the nation into such a fiscal bind that we have no chance of paying back our debts in an honorable way.   While the U.S. is unlikely to default, our leaders will not make it pleasant to hold U.S. debt.

Yes, S&P lost a lot of credibility by completely missing the sub-prime mortgage problems that first appeared a few years ago.  Even in this case, I would argue that they should have downgraded U.S. debt at least a year ago.  However, at least they finally got it right this time, even if they were late to the party.

S&P correctly stated that the country’s fiscal issues and political fracturing have prevented any meaningful resolution to the debt problem.  The debt ceiling resolution would only put a minor dent in the overall debt, so nobody should think that anything was solved.  The $2.4 trillion in “savings” is really just a slower increase and hardly touches a gap that is likely to be ten times that amount by 2021.

Real estate has been and will continue to be hit hard.  Despite low interest rates and less expensive housing, home sales are slow and values have not rebounded.  Banks are understandably less willing to lend, and the government is trying to stifle owner financing and the ability to create a mortgage note.

Professionals buying mortgage notes, like me, are caught in a tough situation.  On the one hand, things are fine right now and the returns are higher and more stable than for other investments.  On the other hand, a person paying on the mortgage note is more likely to stop paying due to either a job loss or the property losing value.  A mortgage note (also called a real estate note), is a long term investment, and we can’t even know what will come down next week, more or less in ten to twenty years.

The immediate future for the economy and the real estate market look bleak to me.  All that we can do is keep an eye on the news, invest conservatively, and cross our fingers.

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