But, how can that be with Wall Street appearing to lie in shambles.  Well, it all goes back to something we’ve been saying our entire careers, “A house is the most expensive investment a person will make in their lifetime.”  And, when that particular investment (or several unflippable investments) goes bad, it really doesn’t matter about the rest of the economy.  One house is more than a lifetime of durable goods.  So, it is quite possible that our economy is suffering from the most obvious and easily avoidable condition of all, “too many eggs in one basket.”

Unfortunately, Wall Street ignored its own advice, and failed to diversify its portfolio.  In fact, it was so in love with mortgages, that it created leveraged securities of such a derivative nature, that $1 of mortgages became $6 to $8 in potential liabilities.  So, with a mortgage default rate of less than 10% (which works out to about $700 billion of loans at risk – does that number sound familiar), the actual potential exposure could be more like $4 to $5 trillion in lost value if those loans became totally worthless.  But, we all know that real estate NEVER becomes worthless, and those loans will eventually turn into foreclosures, new sales and new loans, and the market will recover.  However, this will not happen overnight, and it appears that the entire financial system is frozen until that money begins to free up.  So the trillion dollar question is, “do we allow the capitalist system right the ship, or do we have the Federal government step in and grease the rails of the economy?”

I used to believe that business could always solve our nation’s ills, but the leaders of business are the very cause of our ills.  Perhaps, in this extreme situation, someone else needs to take a stab at solving this problem and jumpstarting our economy, now, when we ALL could really use it, rather than wait for the market to correct itself and rebuild from the rubble.  Done right (HUGE assumption), the purchase of the problem loans at deep discounts by the Federal government could actually lead to our Treasury making a profit, and releasing the flow of credit on Wall Street small business so desperately needs.

Give me a call at 408-8200 or drop me a line at EVK-PA@SterlingCrest.com , and give me your ideas and comments – and see what I can do for you and your customers.  Erik V. Korzilius is a real estate attorney and a Past President of the Venice Area Board of Realtors®.