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Why Some Mortgage Companies Aren’t Flexible

We have heard in recent months about how many Americans have lost their jobs due to the coronavirus pandemic and the stay at home orders. Many of those folks have a mortgage they may not be able to pay.

Mortgage servicers are not as flexible as banks

After the great recession, companies that offer home mortgages became more conservative in the borrowers they lent to. Before the crisis there was a virtual pandemic of what were called “Liar Loans” entering the mortgage market – essentially lending more than a borrower could reasonably handle.

What the mortgage market didn’t examine were the lenders. Not all companies that offer home mortgages are banks. Banks are mandated by law to hold a certain amount of cash in reserve. During a crisis like the one we are currently in they have been allowed to dip into those funds to keep the bank running – even as many people cannot pay their mortgage.

Those mortgage companies that are not banks are merely managing the loan, not the holder of the note like a bank. A mortgage servicer merely collects the mortgage payment from homeowners, handles things like taxes, and then sends the money to the investors – the holders of the note. What they get in return is a small sliver of each loan, allowing them to pay their expenses and maybe even make a bit of profit.

Why mortgage servicers cannot float delinquent borrowers is that unlike banks they are not made to hold cash in reserve. So, no matter how Congress may require banks to offer mortgage relief, mortgage servicers are not in that category, and so not obligated to live by the same rules. If you find your mortgage company not being helpful it may be that they are a servicer and not a bank.

The Supply Chain

In the past few months you may have had more time on your hands, watched more news, or been reading more.  So, you may have heard recently this phrase “breakdown in the supply chain”.  We thought we would visit this topic with a broad overview of what is a supply chain.

The supply chain is vulnerable to disruption at every link

Raw Materials

There are several basic steps on the supply chain.  First, before anything else raw materials have to have been identified and cultivated.  If you are looking for an engagement ring – one of the first places on that supply chain must be mining for the diamond.  If it is a pair of pants then you have to start with planting cotton, let’s say for simplicity.

The raw material step may itself have several steps.  Let’s look at our pants.  The cotton grower may actually purchase seed from someone else, so the seed producer is the first step.  The grower of the cotton may not do anything else but grow it and pick it, then the next step is curing the cotton – cleaning and spinning it into thread.  That processor may not actually turn that cotton thread into fabric, so that material now needs to travel to a fabric processor.

Supplier

Now that we have all this fabric there needs to be someone to get it to the people who will make the pants.  Most processors are too small to be able to deliver their fabric all over the country, maybe even all over the globe.  That is where the supplier comes in.  A supplier usually focuses on getting goods from processor to manufacturer so they may have a wide variety of products they provide.  A fabric supplier may also deal in other things their customers will need – if they are delivering to their customer who will make our pants, they may also pick up buttons, and zippers, maybe even the paper for labels for the pants, they may even supply sewing machines and their parts.

Manufacturing

Once the manufacturer of our pants receives all the materials it needs it can go through the manufacturing process which will include things like design, sizing, cutting, stitching the parts together, and labeling for sale.

Distributor

Now that the pants are made, unless the company that made them is huge and can afford their own trucks and drivers, it will have to engage a distributor to deliver the pants to the retail stores that would like to sell them.

Like suppliers, distributors can carry many different products.  So, when they drop off those pants, they may also drop off shirts and purses to the retailer they have gathered from other different manufacturers.

Retailer

The retailer now has the pants and they need to find a way to sell them.  They have to find a way to get in touch with customers and encourage them to come in and look at the pants – so that means being in a location where there is a lot of foot traffic or advertising, get the word out to a wide variety of people.

Consumer

The consumer steps into the store, spots the pants, treies them on and likes them, decides to buy them and all is well in the world.  The supply chain has worked the way it was supposed to. Everyone happy.

On The Whole

Though it is called a ‘chain’ it is much less linear in a world economy and more like a web.  When the pandemic broke out in China, many factories were initially affected by workers not coming to work because they were sick.  That was a break in the manufacturing link of the supply chain.  All the businesses before and after that step are negatively affected.  If you have raw cotton, but the fabric processor doesn’t need it because the factory that manufactures the pants is shut down because too many people are sick, you are left with a lot of cotton and nothing to do with it.  If it doesn’t get processed it will go to waste.  If the processor has no one to sell to they can’t very well carry on processing cotton into fabric, they only have so much capital to spend and only so much storage space to hold on to unsold fabric.

On the other side, the customer will come into the store and find no pants on the shelves so they may walk away and go to another store.  The suppliers and distributors in between are equally affected. 

If there are supply chain disruptions all along the line, because of illness, or as with our “stay at home” orders, it puts the whole system in trouble.  Because supply chains for almost all products are increasingly global and web-like, what happens in other countries can really affect what happens in ours.  And all the workers along the line, at all the steps, are also consumers of our pants.  We really are all in this together, on a lot of levels.

Gas Prices Low, Oil Below Zero?

It may seem as if the oil industry is bullet proof. They’re loaded right? It may seem that way, but like any commodity, it is subject to its history and the current market.

Oil prices have dipped below zero?

So, why are prices at the pump so low, dipping below $2 in some places? And how does a commodity sell for less than zero?

The part of history that led us to this point happens in the 1970’s. The Arab Israeli war put the US square in the middle with Arab countries nearly over running Israel – who is our ally. The US sends Israel a large amount of weapons, allowing them to defend themselves but making the Arab countries mad. They couldn’t very well invade us so they used the one advantage they had over us – oil. Many of us “of a certain age” can remember the oil embargo and the long lines, shortages at the gas station, rationing (you had to go to the gas station on a certain day depending on the last digit on your license plate). It went on for many months and made voters very mad.

At that moment, the US decided we needed to secure our own oil and energy supply. How did we do that? In a couple of ways over the next few decades. First, we made up and made friends with Saudi Arabia – one of the largest oil producers in the world. We also ramped up American production of oil, and we built oil storage.

Now we are fine, right? Sure, until China and India begin using more oil in the early 2000s. And of course more demand means producers can charge more. Crude skyrockets and gas prices overtop $5 a gallon. Now, the US is annoyed again and sometimes when things are bad innovation happens.

The US has always produced oil. California and Texas have been oil producing states for decades. There has been oil in places like Wyoming and Utah but in a form we couldn’t get to – shale oil. The innovation was a kind of fracking or mining of this type of oil where we could collect it and refine it. Over the next several years the US becomes a large oil producer and even begins to export oil again.

Leap forward several years to this year. You may have heard of the Saudi-Russia oil price war. Oil prices had already started to decrease at the beginning of this year and in order to shore up the prices Saudi Arabia asked Russia to reduce its oil production, but in short, they said ‘nope’.

At the same time, as we know there was a pandemic, COVID-19, surging around the world. By the time the US-Saudi-Russia agreement comes about countries around the world are issuing stay at home orders to prevent the spread of the virus. We in the US are all shut up inside – not driving to work, driving less to other places like the store, not going on road trips on the weekend – and lowered demand means lower price.

While we are all social distancing, oil in tankers is on the ocean making their way to our refineries (tankers can’t make u-turns). Oil production has not significantly slowed (apparently very difficult and expensive to stop an oil pumping site) so while the regular amount of oil is being produced, oil use is being radically reduced. In the US we have alternatives to oil to heat our homes and for manufacturing, but our transportation is largely run on oil.

On top of all the mitigating events that have led us here commodities markets are now bidding on “summer” oil – the slightly different gas that is produced for hot summer months. But as oil has been produced and shipped it has gone into available storage – and that storage is running out. But the oil keeps coming – and so here we are at the moment when an oil producer is so desperate to offload their product that they would pay someone to take it off their hands – thus paying to give it away. That, in a few nutshells, is how oil got below zero.

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