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T.E. Sumner's Blog

By T.E. Sumner | Agent in Rockwall, TX

Fear is Running the Market


We all hear the "Consumer Confidence" figures on TV and radio.  They have dipped to historic lows, and no one seems sure what to do, either about the figures or about taking on a mortgage payment to buy a house. 

Short-Term vs. Long-Term
Uncertainty is driving the market.  People are just afraid.  They're not sure if they will have a job next year or what they'll be paid, if they do.  They're also not sure if income taxes are going to spike up after they've committed to buying a house, ruining their ability to pay that mortgage.  In the short term, prices and interest rates are at all-time lows, making investment extremely attractive. 

Longer term we just don't know what surprise the government is going to have for us.  New taxes to pay for a massive largesse for insurance companies, new taxes to pay back the huge supports that the Feds gave banks, insurance companies and others, and new business fees and taxes to hide these costs are all lurking to pounce on us. 

Mandated Health Insurance
We all wanted the health insurance companies to play fair, and we even elected a President who promised to fix the problem that his mother encountered with delayed and denied insurance claims.  We didn't expect that his solution was to force everyone to pay insurance companies or else face huge Federal penalties. 

We'd really like a different approach on healthcare, not just telling us to get insurance.  Maybe its time to get the finest minds to propose web-based diagnosis for the common man, government support for research to cure and prevent diseases - not necessarily treatments, and to incentivize people to live healthy lives with bonuses.  We have to find a different way of providing healthcare that is not so expensive and not driven down our throats by big government that doesn't even adopt the same plan for itself. 

Small business, likewise, wasn't prepared to take on the mandated cost of providing everyone healthcare insurance.  And they're waiting it out to see what the impact is before hiring people to restore the economy.  What we really wanted was the healthcare industry to charge less and to pay reasonable claims on time.  What we got was a mess. 

Insider Trading
Sarbanes-Oxley was intended to assure that businesses reported their earnings properly and were not scamming us.  Even post-SOX investment banks sold bundled sub-prime mortgage notes as if they were gold.  Enron wasn't lesson enough for the companies or the regulators.  Neither are the outrageous golden parachutes that crooked executives can "retire" with without raising any eyebrows. 

Instead the Fed bailed them out.  Massive amounts of money to AIG, who insured those crummy mortgages, and to others who participated in the massive fraud all smack of insider trading, and no one is addressing these abuses. 

Fraudulent Loans
The sub-prime meltdown was just like the 1929 meltdown in stocks.  Ordinary people (in 1920s this was a shoeshine guy or a regular factory worker) invested in stocks by borrowing money from banks.  As long as stocks went up, those people won big.  When the loans made on margin were called, the collapse began.  The lower stock prices meant the holdings of an ordinary person weren't worth the loan he took out to buy the stock he was speculating on.  He had to sell at a loss, which further depressed prices, and so on.  The spiral down was sudden and disastrous.  Overnight stockpiled wealth evaporated. 

A few years ago, starting in California, speculation in real estate got going in a big way.  Prices were rising at 30% a year.  Why shouldn't an ordinary person benefit from the rise, even if it was due to speculation?  But people couldn't afford the inflated prices and so they either
-  lied on their loan applications (they knew if the loan officers was juggling the figures), or
-  took out loans from sub-prime lenders (or the dreaded adjustable rate mortgages)
Greed was running rampant and spread quickly to Nevada, Arizona and half the country. 
This greed drove speculation and was fueled by easy money, obtained from willing lenders or from those who were defrauded. 

We know the government engendered the loose lending policies but they had to fix it. 

The Big Lending Fix
Feds stepped in after the fact and "fixed" things, first by registering lending people (at a cost of nearly $1,000 per person) on a national level, even if they operated only locally. They changed the disclosure forms (Good Faith Estimate) to expose exactly how much a broker was expecting to make on the loan, as if that was the problem.  Brokers because they're independent agents select from a variety of lenders in the market.  By the way we don't ask Wal-Mart to post how much they're making on products on the shelf. 

Worse, the GFE does not require a banker to show his "profit" on the loan.  A broker acts as a go-between for the primary lender and the borrower.  The theory was that the broker was making money hooking up the lender with the borrower and that was bad.  The unfairness is that if the bank made the exact same loan on the exact same terms, he is not required to expose his profit.  This misleads consumers into borrowing from banks who don't expose their profit instead of brokers where the cost and monthly payments may have been lower. 

Another step they took was to scare the bejeebers out of Appraisers.  Appraisers looked out at market trends and for the most part gave honest opinions of the property values accounting for expected trends in pricing.  Now, with HVCC the rules are so draconian that no appraiser is going to risk having his valuation at market challenged.  Lenders don't even get to pick an appraiser now.  They get what they get through the overpriced anonymous system under HVCC.  And the appraised value they get is often well below market value, driving us further into the hole.  The HVCC system is broken and does not help. 

Profit on Loans
Some will say that yield spread is not profit, or that banks don't make yield spread premiums.  But it is and they do.  The bank may be the primary lender but almost every lender participates in the secondary market.  The banks re-sell the mortgage loans to FNMA or FHLMC or some other government-sponsored entity, as was envisioned by FDR.  Yes, they make yield spread when they sell them.  So, who is fooling whom?  Brokers must show their "profit" (yield spread) but not banks. 

This gives now the impression that banks aren't making any money on a loan.  They are.  Moreover, a borrower would see the YSP line on a broker GFE and see nothing on the bank's GFE and assume that the bank wasn't charging any extra and making no profit. 

This unfairness was created by the New York Attorney General in cooperation with the secondary market and foisted upon the public.  Let's have the AG tell Wal-Mart to expose their profits, too.  When lawyers get together to design a system, it is made for litigation and punishment, not to work efficiently and effectively.  The HVCC does cost more and take longer, and does not decrease risk. 

Risk-Free Investment
Underwriters are supposed to be the guardians at the gates.  These sentinels are charged with evaluating the risk to a lender of a file for a borrower and his property.  They take the information from the loan officer and the (low) value from the appraiser to make a judgment according to rules established by the lending industry.  In order to sell the loan in the secondary market the rules must be followed. 

Administrators at the GSEs set up those rules back when lending was easy.  Yes, the rules have changed dramatically in the last 2 years, because of the failure of the sub-prime loans and ARMs when they were sold as packages to unsuspecting large investors. 

What was the source of failure in evaluating the risk? 
Did the underwriter not challenge the appraiser's rising market price, or did she not think ahead to what might happen if the borrower kept the loan for its full term? 
Often the loans were made by qualifying the borrower on the teaser rate (1%) or on today's ARM rate (3%) and the underwriter was not required to consider what would happen if rates went up in 3 years, much less if rates went up in 5 years. 

But if the borrower could not qualify on the regular fixed interest rate, why would they give them a loan based on a temporary teaser rate? 

If monthly mortgage payments can rise more than an expected rise in income to make those higher payments, why would an underwriter approve the loan. 
And why would banks offer loan products that payments can increase more than expected rise in income?  There is no such thing as risk-free unless there's a bailout available from the lender of last resort, the government. 

Bailing Out the Government
Since so much money went to Citi, BoA, Chase, AIG, etc etc, the burden of repaying that money is going to fall on American taxpayers.  The payment will be either by higher taxes or by inflation.  Pick your poison.  Who will bail out the government from the massive debt they've incurred on our behalf?  Taxpayers will, or else the Federal Reserve will inflate the money supply so that the debt is manageable. 

We all know this.  Because we know it's either inflation or heavy taxes, we're not sure whether to buy a house or not.  The silver lining is that inflation can be hedged against by buying the house.  Fixed assets always rise in value during inflationary times.  But what if the government chooses taxes?  Oops.  They always attack capital gains - so the very hedge buyers are looking for would be taxed heavily to recoup the losses the government created.  Another crash would follow. 

Rent, Buy or Sell?
The uncertainty we're living in leads to a wait-and-see attitude on the part of buyers, and sellers are suffering from the same indecision in a domino effect - they can't buy another house until theirs sells. 

Only renting makes sense at this time.  Wait it out.  But whom can those sellers actually unload their houses onto?  Investors.  With low appraisals and difficult loans only cash investors can afford to buy.  The vast majority of people are just afraid and waiting to see what happens next from Washington. 

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