If you have the time, I would love to put a spin on the real estate market. You see, there are lots of homes for sale. There are newly built homes in developments just waiting to become neighborhoods, there are resale homes including condos, townhomes, and single family homes. Homes are for sale by builders, banks, and everyday homeowners. Sales remain less than one would think, based on the attractive prices of the homes. Why is that?
At first glance, people point the finger at the tightened underwriting for mortgages. The general assumption goes along the lines of something like, well, they lent money to anyone with a pulse and that idea blew up in their collective faces. Loans went into default, lenders went belly up faster than a Chesapeake Bay fish fry, the economy was on the brink of disaster and Uncle Sam stepped in. Programs to assist any and all lenders were created. Acronyms replaced everyday language and those at the top of the pyramid hemmed and hawed until such time as they could fill their own pockets and get out of town. A few did get caught, prosecuted and sent away (I learned on the Real Housewives of New Jersey, going away is the nice way to say someone has gone to jail). As for the rest, they tried to pick up the pieces and put some kind of mortgage lending system back together again.
Are you still with me? I will not slip into the insider language. Oh, CNN can bandy about terms like bundling and securities and high risk manipulation, I don’t think you need those terms. Simply put, when try to reconstruct what happened, it was revealed that mortgages were tossed into a big pots with lots of mortgages. Let’s just call it a “Mortgage Gumbo” or “Financial Stew”. The chefs ( the slick folks preparing the meal for sale) took a little of this (medium risk notes) and a little of that (border line higher risk notes) a fair amount of this (high risk notes) and a dash of this (minimal risk notes) for seasoning. If anyone looked at the mixture, it was hard to define the ingredients. The pot was full and the seasoning masked the contents bubbling below the surface. Once the meal was ready, sales folks slicker than the infamous Clark Stanley (look him up, the original snake oil salesman) began peddling the broth to all takers.
Soon it was discovered that some of the ingredients were toxic. The aroma off the pot sure smelled good, but some of the stuff mixed in was turning the whole meal bad. People that purchased the mix became ill and realized they had spent money on meals that would never feed them. The kitchen, under duress collapsed. People that bought the bad food demanded their money back. Their demands were met with blank stares and various kitchens boarding up the windows and taking the fast road out of town.
There was such a fuss, people overlooked the source of the bad ingredients. By the time, the focus turned their way, lots of the ingredients were not just spoiled, they were rotten. All the Chefs turned to their Uncle Sam and said HELP.
They got it. Like I mentioned, programs with more initials and letters than a world championship anagram crossword puzzle were created. The government of the U.S. of A came riding in on big ole white horse with saddle bags full of riches. Money was given to the Chefs so they could stay afloat while cleaning up their kitchen. People waiting for a new meal, void of the previous toxins, got in line. The salesman, lies exposed and and short cuts denied, vanished.
People left in the kitchen now had to divide their time up between preparing new safe meals, marketing the safe meals and sorting out “what the hell happened’ also were tasked with making something of value out of all the bad meals already on tables all across the country. Now they say, all real estate is local, but this problem cropped up in more places than McDonalds has golden arches.
Yep, that’s the overview. Today, the Fed is buying up bonds and lending money at zero percent and the gap between those that are qualified to buy a home and those that actually can borrow the money seems to be greater today than the morning the country woke up to a collective stomach ache from all the bad stew and gumbo we as a nation had consumed. What the heck is going on?
Let’s take a look at what’s really going on in those kitchens. They say that one bad apple can spoil the whole bunch. Same thing happened with those bad loans. They spoiled the whole pot. Bad loans did not get repaid. Houses were foreclosed upon and resold at less than market value. Prices began to fall. People found it very hard to get a loan. Demand for homes began to decrease. Like some sort of four or five year nightmare, things kept falling and nobody was able to wake up. If you exclude that 1% of the population that politicians like to bandy about, the other 99% of American’s has their current wealth tied up in real estate, they either own it and live in it or own and rent it. When values plummeted, most people suffered. Sure, it may not have been directly, but we all felt the pinch and the economy went into the proverbial toilet.
Now, some hot shot self proclaimed geniuses will say that there were mitigating factors like wars and global problems. O.K., but those factors are always in play. Real estate for the first time EVERYWHERE was in the tank and sinking faster than Joe Frazier in the 1973 Superstars event.
Time has passed. It is still damn near impossible for an average person to get a loan to buy a home. If the Feds are buying up bonds and lending money at zero percent, why is the housing market in such poor condition.
Remember the Chefs? Remember all the batches of crappy stew and gumbo? Stuff has to be sold. Those bad batches of food are still on the books. Their value is diminished and they can’t be sold until all the bad ingredients are sorted out. No one seems to know just what the hell is in that mix. Oh, they tried to straighten it out. I’m sure most of you recall the “robo signing” scandal. Once again the chefs were caught trying to cut corners and move forward. This was really a case of it becoming hotter than hades and they wanted out of the kitchen.
You see, you can’t foreclose if you can’t prove you own the loan. You can’t move forward if documents supporting your claim are spread between Kansas and Iowa and beyond. The beauty of the those documents signed at closing is hidden among the dozens of pages that make up the transaction. It is always in there, in black and white, if you don’t pay, the person or persons holding the note can foreclose. Well, that paperwork got mixed with other paperwork and loans got sold, and bundled with others and sold again and parsed into pieces and sold again. Homeowner stops paying and no one is quite sure whom has the right to foreclose. Picture a game of musical chairs. The band played on while everyone with their proverbial finger in the pie walked around the chairs. Music stopped and the last lender standing tried to show up and say the paperwork is ours. When they could not prove it, well hell, they went ahead and decided to create their own proof. Hence…robo signing.
What to do? It would appear to me that the solution was already in hand. Way back when the Fed’s stepped in, back in the beginning of this mess ( am I the only one that noticed that everything exploded during the end of the Bush presidency and carried over to the new administration?), money was provided to banks. After all, we had to save the banking system. OK, we forgot to put any stipulation on how the money would be spent, but they had to pay it back. Surprise, surprise…very little if any of that money trickled down to the consumer. Banks used it to buy little banks that were in trouble. Banks used it to reward the very people that helped orchestrate the fiasco. Banks used it to make sure they increased their net worth. Then they paid it back.
Now, money is cheap. What the hell is going on? I’ll tell you what is going on …. re-financing. Now, at first glance this looks like a great thing for home owners. It is. People are reducing their monthly payments. In some cases, lenders are reducing principle and re-financing homes. It is a great time to be in that market. Oh, the banks are not doing this because their is less risk. The banks are not doing this because the loan to value ratios are terrific. Nope, the banks are bailing out of a paperwork nightmare under the guise of lending money. They are just shuffling here and rotating there and offering re-fi’s to anyone with a loan. It is cheaper to just refinance and create a new starting point for the mortgage than try to unravel the convoluted paperwork trail that is supporting the current loan. Everything old is new again! Doubt it? Here is a big clue for you. Lots and lots of people bought homes using more than one loan. Now, if it ever comes to foreclosure, the first trust gets first dibs on the proceeds, if anything is left, then the second and third etc trusts get to fight over the remains. Homes that are upside down don’t have much left. The folks sitting at the board room tables realized, if we refinance, we become first and clean again. No need for “robo signing”. They will have a clean mortgage document and they can foreclose much more easily. People are getting first trust refinanced when they are in total “under water’. Lender doesn’t care, they know if the loan goes south, they are primary and get bulk of the proceeds. Their cost to foreclose is reduced and their ability is enhanced.
Now, when they are cleaning up their books, do you really think they have any reason to increase the rate of home loans to new buyers? Every refinance completed improves their balance sheet, if not numerically, certainly from a risk management point of view. When they determine that they have brought their exposure down to a manageable level, they might loosen the purse strings and begin lending at a bit more relaxed fashion again. But, when the Feds are making it easier for them to clean up the soup, they have no impetus to put more money at risk.
Once, the books are cleaner and the balance sheets are stronger, well interest rates will climb. Don’t be surprised to see lending requirements relax in direct proportion to the rate interest rates rise. Don’t be fooled by fancy slogans … banks are not your friend, they are in business to make money, as much as possible. If lending to consumers becomes more profitable while becoming less risky, the housing crisis will be over.
For right now, no soup today!