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Thread: weekend commentary - 'Tightening the Noose'

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    Default weekend commentary - 'Tightening the Noose'

    I can't independently confirm this, but it appeared on an investor's BBS I follow which has a whole lot of financial professionals as regular posters ...

    --------------------------------------------------------------------------------------

    "the beginning of the end" for Real Estate as Stated Income (loans) drove the markets over the last two years. The following is (supposedly an internal communication) from a big (mortgage) broker (to staff / agents who originate new mortgage applications):

    "'Every lender out there is vigilantly searching out loan files for anything that smacks of loan fraud. They are looking for the regular irregularities, such as altered documents, doctored VOM's, VOE's etc., even doctored credit reports and appraisals. They are also verifying that on Stated loans, that the information 'stated' is real. If you state that a person is a vice-president of a company, then he better be. If you state that he has 100K in the bank, then he had better have 100k. The excuse that 'the borrower told me so' doesnt fly with lenders, its the info submitted by the agent in the loan application that matters.

    The more aggressive q.c. depts. are verifying that W-2's submitted are real, that paystubs are real, that signatures on the initial app match those on documents submitted at the end of the loan. They are matching signed loan doc signatures with initial loan doc signatures. They are verifying that faxed signatures and docs match those subsequently submitted. They are verifying that Appraisers are indeed licensed, and that his license is current. They are verifying all bank account numbers are valid, that the balances are valid, and that the employee signing the VOE, VOD, VOM actually exist and even verifying those signatures. (In other words, they are verifying the employment of the person who is verifying the employment of your borrower!!). They are even verifying that appraisal photos submitted with the appraisal for comps and for the subject property are real by sending out someone to drive-by those properties for verification.

    In other words, there is an all out effort to catch anyone doing anything that smacks of fraud. If they think there's fraud, you are GUILTY until you prove otherwise. The consequences are becoming more and more severe. There is a movement to turn in anyone who commits loan fraud, even the most minor of incidents, to local civil authorities for criminal prosecution."'

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    Default Re: weekend commentary - 'Tightening the Noose'

    Well the problem is that in the last two years, mortgage bankers, (brokers-- the distinction no longer matters) and in house loan originators have had to drop standards on both commercial loans and home mortgage loans to keep the amount of mortgages flowing to keep their new performance incentive pay coming. Tends, I think, to influence their decision making in a very liberal direction if they are "paid for performance." No doc and no income loan verification home loans are really stupid for lenders or the end purchasers of loan packages. I have it on very good information that lenders in California advance money
    in cash so borrowers can furnish their houses from the loan amount proceeds. This does not fly in the Midwest or south as lending practice, but I have been out of touch since 2004.
    The over lending disease on non real estate components could of hit these areas also.
    The point? Technically furniture is not attached to the real estate and is not part of the collateral value backing the loan. On CMBS transactions a different sort of "Wall Street Speak" is in play. (Commercial transactions). The law of large numbers and reserves in the collateral pools are supposed to keep these packages current and not in default. Spreading the risk in amounts of loans, and geography does make sense on probability and risk I guess. Unless, of course, there are too many risks, too many unforseen economic events, and too much weather damage all at once which can overrun the reserves. The difference is that on home loans you may have outright fraud, and on commercial CMBS you just have too many people putting their faith in untested by time theorey. The CMBS packaging market for bonds is not that old a process, only less than twenty years, and only big dollars in the last ten years. CMBS underwriting is tightening on fundamental real estate analysis and bond credit tightening. This market may self correct itself or limit the damage. For instance trully bad commercial real estate loans with poor fundamentals, and highly polished numbers, are not going to make it into bond packages and the go go marketing brokers who originated these loans are starting to take big hits on being unable to sell them into the pools. This is as it should be.

    But, the housing loan package bonds are probably going to be disasters. This is also as it should be, because you get what you pay for on wall street. I can see the laughing now on pay for performance compensation plans for loan brokers. This too shall change in the future for decision makers. Bond people truly are unamused be default and take vengenance unlike the stock investors.

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    Default Re: weekend commentary - 'Tightening the Noose'

    While your point about 'incentive pay' may have played a role, it is arguable that there were even bigger powers who wished to continue the 'bubble' of rising home prices - which only keep rising if there is a steady stream of willing buyers who are able to obtain financing.

    and IMHO here's the 'dirty little secret' as to why this has been allowed to continue by Fed regulators ...

    .

    .
    .
    The 64 trillion dollar question is 'what does the Fed know, and what to the huge bankers know, that they are not telling US, which is causing the Fed and huge bankers to suddenly shift into C.Y.A. mode with a vengeance !
    Last edited by Melonie; 02-25-2006 at 10:29 AM.

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    Default Re: weekend commentary - 'Tightening the Noose'

    Gosh! Negative to almost no GDP growth from 2001-2005! 2004 with 1% growth would be slow growth. Might be running out of housing equity to draw money out of. The lack of housing equity would be aggravated by any flatness in values or decline in morgage production velocity. Almost like a vast Ponzi scheme involving home brokers, real estate agents, wall street bond packagers, Federal Reserve statisticians. Sorry. My tin hat is on. I'll take it off now. My mistake. It's just a lack of judgement caused by "performance pay
    incentive system" for financial decision makers.

    In 1986 Paul Volker (and his friend Dr. Doom at Salomon Brothers), got upset that with mortgage rates declining from 11% to 13% range down to 9.5 to 10% range, that people would try to take "cash out" of their home loans. With ronald Reasgens approval, they made if difficult to get mortgage loan refinances where you took money out. I know because I was trying to take out $30,000 and build a swimming pool. Could not get any local bank or S and L to take out the 12.75% existing loan. Finally just refinanced the balance at 9.75% and got a deal. 9.75% was a very good deal (0 points) in 1986-1987
    as rates had been above 11% for the past 6 years.

    It was very difficult to get a MEW (or cash back from refinancing) deal in the mid 1980's.
    Then somebody pulled a switch, and everybody could get cash back by 1990 time period.

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    Default Re: weekend commentary - 'Tightening the Noose'

    Almost like a vast Ponzi scheme involving home brokers, real estate agents, wall street bond packagers, Federal Reserve statisticians. Sorry. My tin hat is on. I'll take it off now. My mistake.
    I hear you on the 'tin foil hats' ... however this apparently officially sanctioned 'easy cash back' period, contrasted by the very abrupt 'slamming of the door' which appears to be taking place right now, really gives rise to suspicions ...

    The kicker is that if there was an apparently officially sanctioned 'economic stimulus package' in place which used MEW money rather than gov't money, it is the MEW homeowners who will now be stuck paying back real dollars to 'keep' their houses - a problem further aggravated by the likely fact that the resale value of their house may decline significantly - i.e. their current / near future mortgage equity may fall below zero - thus making it impossible for them to re-fi.

    Stand by for 'S & L Crisis II' !!!

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    Default Re: weekend commentary - 'Tightening the Noose'

    This will sound out in left field but i have a theory.

    I think big business is tryin to bankrupt America. Why? Wages and benefits. With the demise of top two automakers there is a huge push here in Detroit to kill the unions. Unions have been a huge pain for big business.

    With the global economy, out sourcing, credit card companies games, the mortgage bubble, and countless others to list it makes little sense how and why these things are allowed. If it is to keep a saging economy afloat on the backs of bankrupt Americans, it is piss poor excuse.

    Since the 80s there has been a steady stream of deregulation of the markets and in the financial world. Maybe i just have a tin foil hat, but i feel it is an effort to bring America's middle class to it's knees and on the same level as many other countries across the world. The middle class in this country will no longer exist in the form it does now and big business will have higher profits.

    Follow the money trail and laws back to the source.

    Like this port deal for example the one thing that isn't said in the press is there is a 6.9 billion dollar loan the company in the united arab emirates is receiving to take over the british company. Guess where they are getting it? the American government. Some in the goverment will get very rich off this deal in the end. That is why it is even on the table. It is all about money and not the American people anymore.

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    Default Re: weekend commentary - 'Tightening the Noose'

    IMHO your theory is partly correct ... that American businesses are resorting to bankruptcy in order to use the courts to abrogate union contracts. However, the fact that these union contracts call for 'outrageous' wages and benefits by world standards is the real reason that American businesses have little choice but to trim these pay rates and benefits to more realistic and sustainable levels or truly go bankrupt. As to how the unions were able to leverage such unrealistically high wages and benefits for their members in the first place, I'll leave that to you to research some recent American history. I would just comment that it was never about the American people as a whole, it was about union members, union leaders, politicians, political contributions etc. Nobody seemed to care one bit that American cars have cost 'average Americans' 20% more than they really should have for the last 50 years to finance union wages and benefits - until foreign car makers started selling cars for what they really cost !

    As to the true source of the 6.9 billion dollar loan, even though American banks may be handling the transaction the actual money being loaned is probably petrodollars i.e. money from oil sales deposited in US banks by middle eastern govt's and individuals. If the truth were told, essentially none of the money deposited in US banks is American anymore ... because Americans in general are spending more than they earn, and have been for several years now ! Essentially all of the real money behind everything from new American mortgages to Corporate Buy-Outs is not American anymore, and America is dependent on foreign sources of new capital to the tune of something like 1/2 a BILLION dollars per day to prevent the whole country from going bankrupt !

    Like it or not, America has been part of a global economy ever since Japan graduated from transistor radios to color TV's, ever since Germany graduated from cukkoo clocks to Volkswagens, and ever since EPA and OSHA passed strict regulations plus trial lawyers won billion dollar product liability settlements making it unprofitable for American companies to produce certain products anymore. Thus America has been enjoying a relatively clean, safe, comfortable life for the last 40 years or so ... but a life increasingly dependent on foreign products and foreign money being loaned to allow us to buy those foreign products. At the time it seemed like a great deal since the pollution, accidents etc. which went along with certain industries left the US and migrated to Mexico or Eastern Europe and eventually Korea and China along with those industries. But the 'wealth creation' also left along with the pollution and the accidents, gradually forcing Americans to either see their standard of living decline or to 'borrow back' that wealth that was now being created in foreign countries instead of here in America (a debt that someday will need to be repaid).

    There really is no such thing as an 'American' bank anymore since our economy is entirely dependent on foreign money. This is at least part of the reason that the American gov't now has limited 'real world' powers to regulate banking. Also, the US gov't itself is totally dependent on foreign investment in US bonds to keep the US$ and American economy afloat. At this point in time, there is simply no way that America could ever extract herself from a 'global' economy unless America is prepared to go back to home gardens, firewood, and horses ! America has enjoyed the benefits of 'globalization' in terms of exporting pollution and accidents, in terms of 'cheap' foreign products taking a smaller bite out of family budgets etc. But eventually, the debts we are running up to foreign 'lenders' are going to have to be paid by one means or another.

    You're not quite correct about the issue of globalism killing the 'middle class'. IMHO the greatest 'equalizing' force exerted by globalism is to level the standard of living between 'unskilled' workers in America and 'unskilled' workers elsewhere in the world. The pressure actually being exerted on the 'middle class' comes from federal, state and local gov'ts who impose high taxes to extract wealth from the 'middle class' (i.e. lower their standard of living) and transfer that wealth to the 'unskilled' in the form of social welfare programs, subsidized housing, even subsidized energy bills these days - which artificially props up the standard of living of 'unskilled' and unproductive Americans at the expense of those who are skilled and productive.

    But coming back on topic, from a financial standpoint IMHO you are correct that both 'middle class' and 'unskilled' Americans are all probably headed towards the same 'lowest common denominator' - i.e. very limited creditworthiness, an inability to save and invest, living paycheck to paycheck etc.
    ~
    Last edited by Melonie; 02-26-2006 at 03:02 AM.

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    Default Re: weekend commentary - 'Tightening the Noose'

    Melonie, the methodology used to create the chart of MEW and GDP is absolute TOTAL CRAP. I do not know if you read the real article at http://calculatedrisk.blogspot.com/2...-mortgage.html
    dated 12/09 but it is flat out wrong methodology. First it compares apples and oranges with mortgages and construction to calculate MEW, then it assigns 2/3rd of the difference to lost consumption and hence to GDP--this completely "forgets" a lot of those consumer goods are imported and would be an offset. Also since the bozo does not know he is doing the first calculation wrong, he is also likely to be doing the chain-weight math wrong. You cannot just subtract one thing from another.

    As an example of why MEW is figured wrong, the mortgages in the Flow of funds include 100% of everything outside the corporate and government sectors--thus it includes evey dime of partnership/sole-proprietor mortgages--the primary forms of financing for small businesses building McDonalds, and other such commercial-but-not-corporate mortgages. It also includes mortgages taken out by Harvard and Princeton.

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    Default Re: weekend commentary - 'Tightening the Noose'

    If people have been tapping their home equity to maintain their life styles, (such as my borther in law- when he gets in trouble every two years he takes more money out because the values keep going up), that would be why consumption and GDP have held up. Ok say it's wrong on the chart. What would you guestimate is the true effect of MEW mortgage borrowing on propping up GDP. Half, a third, a quarter? If no effect on published GDP clearly state why.

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    Default Re: weekend commentary - 'Tightening the Noose'

    Quote Originally Posted by Niceguy
    If people have been tapping their home equity to maintain their life styles, (such as my borther in law- when he gets in trouble every two years he takes more money out because the values keep going up), that would be why consumption and GDP have held up. Ok say it's wrong on the chart. What would you guestimate is the true effect of MEW mortgage borrowing on propping up GDP. Half, a third, a quarter? If no effect on published GDP clearly state why.
    Mortgage equity withdrawals clearly provide a prop of consumption and have added to consumption. Some of that is imported goods so the net is not as large as it appears. Also some of it is for home improvements which are alterations to existing structures and investment. Maybe a half percentage point on growth at its maximum--which happens to have been 2000-2002, not the present.

    This will go to zero, not inherently "reverse", since most home equity withdrawals do not eliminate equity and the majority of those loans have equity of 40-50+%. My own home equity loan reduced by equity to a "dismal" 77% from 82%. If my home price fell 10%, the share owed tha bank would go up but the payment would be the same.

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    Default Re: weekend commentary - 'Tightening the Noose'

    True. But if the value of the property declined 15%, your loan to value ratio would be approaching something close to 90%. That was the old underwriting red line where further increases in loan balance (or cash out) would no longer be allowed as a matter of prudent underwriting. I would agree that most lenders appear no longer prudent in their underwriting. For many, a static value or 10% decline would be the end of the cash back merry go round. Given the New York areas strong job creation, but potential problems on overall housing value given the past ten year excessive housing value increases each year, the risk of default isn't large, just the end of the money train cash back for awhile.

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    Default Re: weekend commentary - 'Tightening the Noose'

    Well, these reports would tend to indicate that many homeowners don't have anywhere near the 40-50% equity you referred to. Mortgage lenders are taking major lumps because, by state law, minimum Sherriff's repo auction bids must be $1 over the amount owed to the lender - but in most cases the amount owed significantly exceeds the current market price of the property.




    (snip)"Lenders, stuck with the homes, lose up to $50,000 per house as they clear them out at below-market prices. That can lower property values in neighborhoods, pushing more homeowners to move out, and eventually hurt property tax collections for local governments."

    (snip)"Even with so many foreclosed homes, few actually sell at auction; most end up going back to the lender. In most cases, explained Ben-Ami of the Sheriff's Office, the homes are worth no more than what's due to the bank. At Wednesday's auction, three of the 379 houses brought bids -- all for just $1 over the amount owed.

    "Last week, we sold one property to an outside bidder," Ben-Ami said. "When they find out what the people owe, they're shocked."

    With the auction ended, she helped bundle the foot-high stacks of legal forms to be officially filed.

    She would return Thursday to watch as another 148 homes went to foreclosure."

    ~
    Last edited by Melonie; 03-01-2006 at 03:53 AM.

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    Default Re: weekend commentary - 'Tightening the Noose'

    Niceguy, I may have worded it poorly, but my equity is 77% of recently appraised value, not the debt. My debt is 23% of value.

    While the flow of funds data is compositionally flawed as I indicated in other posts (includes a lot of irrelevant stuff in both the numertor and denominator) the value of mortgages held as a percentage of property values is 28% nationwide. If, repeat if, the homeowner mortgage share were TWICE as high. the very vast bulk of people ave to do nothing in the wake of a medium-large price adjustment.

    Almost none of you realize it, but the value of your (now) used car went down 10% from late 2002 to late 2004. If you sold your car at the bottom (sale or trade-in), you would notice the loss (maybe), otherwise you had a car that did the same thing as before and a year and a half later the prices are almost back and you have a 18 month older car.

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    Default Re: weekend commentary - 'Tightening the Noose'

    Yeah mortgage debt to value (Loan to value) is fairly low, but not in the mid 20's to age 40 group.

    I hear alot of used Chevrolets and Fords (more than usual) are being shipped south of the border because they won't sell here. This would be an anedote on your value car issue.

    There is huge value loss within the first year. The story here is is the value of used cars
    that were recently new is now even lower than the typical percentage loss of five years ago. The question is why are the resale values lower?
    I think the following:
    The point could be that people are going for efficency again like they did 1975 to 1983.
    The non efficent cars tend to be GM and Ford with a Chysler, Mercedes and others mixed in.

    I will admit I can't prove the above, but time will tell on the story if I am right.

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    Default Re: weekend commentary - 'Tightening the Noose'

    lmost none of you realize it, but the value of your (now) used car went down 10% from late 2002 to late 2004. If you sold your car at the bottom (sale or trade-in), you would notice the loss (maybe), otherwise you had a car that did the same thing as before and a year and a half later the prices are almost back and you have a 18 month older car
    Used car resale values are only analogous to real estate when you refer to 'classic' cars or 'collectible' cars, which can actually appreciate in value with the passage of time. Otherwise, EVERY used car is guaranteed to lose value, and virtually EVERY car loan is written within a time frame and payment structure which does not depend on the stability of a resale market for the used car as collateral (yes I know exception to the rule some long and expensive car loans are now into 'gap insurance' territory). Plus every buyer has a clear mindset that their freshly purchased car will steadily decline in resale value over time, such that their future options to re-fi are extremely limited and their future options to extract 'equity' as part of a re-fi are essentially zero.

    Thus a 10% fluctuation in used car market values in reality only constitutes a minor time extension/contraction in your used car's steady decline to scrap iron value. This is far different from housing values which are theoretically never going to decline to zero (hurricane damage nonwithstanding), and are theoretically going to keep increasing in value forever.

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    Default Re: weekend commentary - 'Tightening the Noose'

    Melonie, your comments are all wrong. The decline in used car prices is exactly like houses, except for time frame and scale. The decline I noted was in the CPI for used cars. BLS series CUSR0000SETA02--it adjusts for age and mileage and models.
    go to http://data.bls.gov/cgi-bin/srgate and see for yourself.

    Houses do depreciate in value at an unchanged price level. If you do not believe that do not paint your house for 20 years, so not fix the roof, and do not replace the hot water heater or the front door sill where rot is setting in. The value of the house will go down by the cost of the replacement of these items plus the repair of the structural damage done becuase these items were not done. Maintenance expenses are spending to offset depreciation. Houses depreciate slowly, that is true--about 2.5% per year. this will be less visible if hidden by an inflation rate greater than 2.5%. That rate has been exceeded for almost all of the past 40 years and gives the illusion that it is not happening, but it is a mere illusion.
    The car world is different only in that it happens faster and it is ultimately easier to replace the entire vehicle, than all the parts that aged. There is a style fator in cars that is larger than houses but try to sell a 1930's shotgun house right next to a McMansion, and its value has gone down so much it is cheaper to destroy the shotgun house and build new.

    The LAND does not depreciate, and land can be 25% of the value of the house (depending on location). The water, sewer, and other hookups depreciate very slowly, as do foundations. Internal paint deteriorates and has to be replaced, and floors need to be sanded and refinished to match original state. Carpets (like wall-towall) have to be replaced and are not cheap. Do not say that is just maintenance--most maintenance is to offset depreciation--the maintenance that is not depreciation is vacuuming the floor.

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    Default Re: weekend commentary - 'Tightening the Noose'

    Land does depreciate in real value in those shrinking towns and cities - look at the small towns in the midwest and the south.

    I think Melonie has a lot of good points and could be right. We could be at the precipice of disaster. However, our bankers have learned lessons in the past and you will see a lot of tactics used to avoid a crash:

    1) Mortgage servicers will do anything to avoid foreclosure and sheriff auctions. This is already done in the $600+ housing market - (IMO the most at risk these days).
    2) CMBS - totally different market - credit standards today are tighter than they were in the late 90's (when there were a bunch of sharlatans selling the pools). I ran a special servicing shop back then - you wouldn't believe the crap they threw into those pools. Rising values are driven by low interest rates, not speculation like the late 80's and early 90's.

    The residential market is flush with speculators - it'll be interesting to see how it shakes out in 9-12 months. I'm getting my investors lined up for some targeted cratering.


    "Life is not about the number of breaths you take.
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    Default Re: weekend commentary - 'Tightening the Noose'

    Land is not depreciable in the accounting and appaisal sense of depreciation. Land has no
    "economic life" as does cars and equipment and houses and buildings. I agree with Monty on this.

    I disagree on the percentage of land to total real estate housing value. My land was 25% of total real estate value (land+site improvements+structure). Now the land around here for residential is 60% of total value and rising. Commercial land is still at 30 to 35% of total real estate value. In a sense out entire suburban area (which used to be a small rural town) is a "transitional use" meaning we should all be demolished and rebuilt.

    On a pure economic highest and best use, the cruel business logic would be to tear down the five surrounding suburbs and rebuild them entirely as mc mansions with three times the size of existing housing presently on them.

    My rate of appreciation is 2.7% per year on the physical structure for twenty years, and
    20 per cent per year on land.

    The 2.7% is quite normal for outer Illinois. The twenty per cent per year for land is not.

    This is a classic example of Urban Land Economics in which demand and limited supply causes land to appreciate in value.

    The only physical depreciation on land I have ever seen is environmental damage, mostly
    PVC's from dry cleaners or hydrocarbon problems with oil tank farms and the like. The accounting point here is that land does not physically deteriorate

    The point being that square footage of space on a planet does not disappear or deteriorate
    unless the entire planet disappears.

    Again on cars the rate of economic depreciation in dollars on cars is much higher now than it was four or five years ago. You get less on your sale of the used asset. The trade in value from a dealership is not correct as that is used as an accounting plug number to make the deal work and not have to actually discount the retail invoice price.

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    Default Re: weekend commentary - 'Tightening the Noose'

    I think the meaning of this is obvious. Dot the I's and cross the T's so the insurance companies that sold policies on the loans can't weasel out of their contracts.

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    Default Re: weekend commentary - 'Tightening the Noose'

    Melonie you have brought up the skilled vs unskilled thought before. I disagree. The middle class isn't just unskilled labour. Skilled workers are also effected by this economic crunch.

    Why were the unions able to get away with their demands? Companies give in to their demands. Not until GM hit bottom have they ever said no to the unions.

    These issues do not just effect the have and the have nots. They effect us all. Sitting behind a desk with a degree will not protect you from this down turn. The only thing that will protect you is educating yourself and others about what is going on. We all must speak out before its too late.

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