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By T.E. Sumner | Agent in Rockwall, TX
  • We're Nearing the End Stage of the Recovery

    Posted Under: Home Buying, Financing, Credit Score  |  April 10, 2011 1:54 PM  |  1,435 views  |  No comments
    Anyone versed in Project Management recognizes the distinct stages that a project passes through.  The housing market and the goal of increasing home ownership has over the last decade passed these stages with about a 2-3 year pause in each step. 

    Post-9/11 America suffered greatly from a loss in confidence.  Geographically isolated and militarily strong, we should have been immune to the massive economic shock that struck after the slaughter of innocents and destruction visited upon us by fringe religionists.  (If you discriminate unfairly solely on the basis of race, you're a racist.  A religionist must be using religion.) 
    The administration understood that re-building confidence and economic activity would require a huge undertaking and they centered it on home ownership. 

    The stages of the real estate-based economic boom, as with all projects,  passed through these stages. 

    1. Euphoria and Excitement, sometimes called Enthusiasm
    Homeownership during this phase increased significantly.  People got really excited about the prospect of owning a home.  With little down a buyer could attain the American dream.  Interest rates weren't all that low, but with some tricks, like mortgages that changed rates down road, we were able to accumulate a massive amount of real estate with people actually living in it. 
    Of course, we also accumulated a fairly large amount without people living in it, owned by investors, planning on cashing in on the boom.  It was the best of times.  Ownership growing, property values growing, investment growing, growing, growing, gone..

    Wall Street greedily packaged up the loans into Collaterized Mortgage Obligations and with their "USDA-inspected grade A stamp" sold them by the billions on the global market.  Anyone who analyzed the true risk of the portfolios would realize that they couldn't be that safe, but they were insured by large carrier and re-insured by others, like AIG, making them appear safer than they were. 

    Bernanke didn't like the $800k prices for 3BR homes in the Valley.  That's absurd.  He also knew that the Las Vegas speculation was getting way out of hand, and worse, the speculation was spreading.  How to slow it down?  INTEREST RATES!!! That's how.  The epiphany was stunning both in its simplicity and its effectiveness.  FOMC could jack up interest rates and homebuyers would return to being renters.  Speculators would realize the error of their ways and all would be right in Utopia. 

    2. Disenchantment AKA Disillusionment
    The interest rates were jacked up and borrowers turned away from the lending window, because it was too expensive, even with those 1% teaser rates.  It didn't seem possible anymore to buy something for $580k, sell it six months later for $660k and pocket $40k.  A fire in the Southwest (akin to being 90 stories up) was burning. 

    The CMOs began losing value as the realization sunk in that the portfolios of speculative loans were just that, speculative in nature.  Builders with lots of homes on the ground stopped hiring contractors to put up more.  Then, when no one bought the existing stock of inventory, they stopped paying on their debts.  Unemployed construction workers collected FUTA and sucked the funds dry.  Unemployment began to spread.  Owner-occupants speculating on their own residences by leveraged buying saw the handwriting on the wall. 

    FOMC did not change the interest rates, and FNMA, FHLMC, and FHA did not change the loose borrower requirements, and FDIC did not change reserve requirements.  Interest rates were kept high and the possibility of finding new buyers to expand the chain letter dropped to miniscule levels. 

    3. Panic & Hysteria
    The fire in speculative properties began to spread.  Smaller fires in almost every major market ignited, (as the jet fuel of collapsing speculation dripped down into other markets).  Unemployment, bankruptcies, non-payment on mortgages grew at an alarming rate. 

    Homebuyers unpacked their bags and decided to stay put.  Builders shed inventory as quickly as they could.  Banks happily lent more money via credit lines and credit cards to now unemployed borrowers.  Repayment wasn't an issue the banks had built escalating rates into their card agreements.  First, a late payment fee equal to a 20% hike in the interest rate was added to the credit card bill.  Second, the interest rate was hiked from less than 10% typically to 20%, effectively doubling the monthly payment.  Third, the interest rate was jacked up again from 20% to nearly 30%, effectively tripling the monthly payment. 

    Homeowners living off credit cards, especially those on unemployment, were faced with card payments that went from 10% of their old gross income to 30%, and the new income was even smaller.  The mortgage payment became an option.  How can you pay on an ARM that has risen from 4% to 5%, when that means a 20% increase in your mortgage, especially when your credit cards are now 3 times the size they were?  You can't.  So, people didn't.  They knew the homestead foreclosure process would take months, maybe years.  So why pay? 

    No, of course the banks didn't own the mortgages anymore - they had sold them to the GSE (Fannie Mae, Freddie Mac, etc).  But the GSEs had the power to push a mortgage back onto a bank in certain circumstances and get their money back.  Countrywide didn't actually have trillions of dollars to lend; they got it from the GSEs.  So, when loans came back to them because somebody used the loose definitions or outright lied on how much money they earned,  Countrywide had to pay up for the foreclosed loan.  And down they went. 

    Bank of America was stronger than Countrywide and could handle the cashflow problem, but they weren't loan servicers, at least in the league of Countrywide.  Absorbing Countrywide into BofA was a costly and time-consuming operation, fraught with confusion over conflicting methodologies, different IT departments, different policies, different organizational politics - just a marriage made in Reno, or maybe somewhere warmer. 

    But why don't the asset managers just liquidate the properties?  After all, they're insured.  With only the 80% part at risk, the banks should just liquidate and go on.  The MI people will pick up the slack on the 17% or whatever.  Time to panic.  [Mortgage insurance is based on 80% of the market value of the property.  It covers losses above the 80%.  A loan on a property that is worth twice as much doesn't have mortgage insurance usually, because the loan is only 50% of the value.]

    Panic had set in because even AIG couldn't pay up to the tune of the mounting losses.  Somebody was going to have to bail out Lehman and AIG.  Nope.  Well, okay, AIG will get some money.  But all those CMO holders are SOL (sorry, out of luck).  Okay, so Iceland gets a little hot under the collar about the deception, and so a few other, maybe several other places go down, too.  That's business. 

    The spreading unemployment, rising debt payments, and collapsing economy are a lot like watching the 90 stories collapse down in pancake fashion from the fire that burned uncontrolled so far up. 

    4. Search for the Guilty
    Wait a minute!  Somebody's gotta be at fault here.  And somebody has to pay.  We can't have massive Wall Street losses, massive GSE losses, massive bank losses and such dislocation in the economy without placing blame somewhere. 

    I heard many times that real estate agents were at fault, because they should have seen the crash coming.  Crazy!  As agents for buyers and sellers, they do what their principals tell them.  Buy, sell, the price, the timing, etc.  It's all the buyers and sellers who dictate events (within the law).  Good thing that accusation didn't stick. 

    It was unscrupulous loan officers.  They did it.  Buyers came in, told them how much they wanted to borrow, and the loan officers (who aren't agents of the borrower) arranged it.  Borrowers had to produce documents showing income, had to sign documents swearing the information was accurate, and underwriters took that information plus verifications obtained by processors into account when approving the loan request.  
    Hang on, maybe the borrowers were lying?  Maybe the borrowers knew they didn't make as much money as the papers said they made?  Oops, politically a faux pas to blame a voter for lack of integrity - they'll show you elected officials who has integrity by not voting you into office.  Borrowers must have known that the loan would have to be paid off, and they just thought to themselves "maybe I won't make as much as $40k, but I'll break even at least."  Politicos can't blame greedy borrowers speculating on properties, even if they knew the risk - it must have been someone else. 

    Underwriters as cautious.  Aren't you a little curious why you don't hear about how many were fired or charged with perpetrating fraud?  Maybe because they were following the rules laid down by Fannie, Freddie and HUD they aren't at fault.  But ask yourself this:  if a loan has a 1% teaser rate valid for 5 years and then the payment re-casts to double or triple, wouldn't you raise a red flag to the FNMA/FHLMC/FHA people that the 3-year outlook rule makes no sense?  Oh, my gosh, don't rock the political boat by asking questions - just follow the rules. 

    Since it wasn't greedy borrowers, greedy investors, greedy Realtors, or undercautious underwriters, maybe it was the GSEs?  After all the rules underwriters were following were promulgated by HUD and FNMA etc.  The rules said you had to consider only 3 years into the future, not what might happen if the Fed raised the interest rates that affected the loan payment 4 years down the road.  But if we blame the guys at the top for not having a vision, we're saying those organizations are constructed on faulty ground.  But don't the guys who make the big bucks expected to anticipate things, while they're driving around in their SUVs.  Don't they bear responsibility for predicting economic events, especially at their astronomical salaries and with their bonuses.  They were just doing what they were ordered to do: increase home ownership.  Uh-oh, you mean their G&Os aren't written to say keep risk acceptably low at the same time as increasing ownership.  Bad Goals & Objectives are often used to pay bonuses, sometimes multi-million dollar bonuses to CEOs and executive officers.  So, who wrote the goals?  Politicians?  Well, then forget about blaming GSEs, unless the truth gets out - then it's every man for himself.  At that time we'll just suggest folding up the GSEs into the government. 

    5. Punishment of the Innocent

    Having gone full circle, we again arrive at blaming loan officers.  The problem is they're not Federally regulated.  So, we'll demand that all of them get national licenses.  We know the states are incompetent at regulating things. 

    Even if the loan officer operates solely within his state and is licensed by his state, we can order him to get a national license.  We'll have to be careful not to call it a national license.  We'll call it registration of his license - but it'll be the same thing. 
    The loan officer will have to get Federally educated, Federally fingerprinted, and "register" his license Federally.  The education, testing, fingerprinting and so on shouldn't extract more than, say, $1,000 or so from each licensee.  If they don't have it, they shouldn't be licensed.  Big Ooops.  In the last 2 years more than 70% of previously licensed loan officers have bailed out.  Thank goodness.  They were all scumbags, right?  Couldn't we just seek out the loan officers who assisted borrowers in lying and revoke their state licenses, you might ask.  No.  Don't ask why.

    The only other thing to consider is where to get money to pay for bailouts, like AIG and investors in CMOs.  We'll leave that to the taxpayers.   

    6. Reward for the Uninvolved
    We're about to embark on this stage of the project.  Now that we have 'gotten control' of the situation, we can move on to rewarding those who did nothing while the housing industry pancaked into oblivion.  We have already identified the guilty pilots of this disasters as the loan officers. 

    Who could be rewarded? 
    Maybe FDIC needs some bonus.  Maybe the banks (that don't actually hold the mortgage loans but sell them on to the GSEs) need a bonus.  The answer is obvious:  remove the bank's competitors.  We can actually punish loan officers and reward banks at the same time. 

    We introduced the new GFE to expose the money a mortgage broker made on a file.  The broker doesn't do anything more than arrange a bank or insurance company or pension fund to make the loan.  The bank on the other hand, uses its own funds for a couple of days to a couple of months before it re-sells the loan to an investor, or GSE.  So, on the new GFE the broker has to tell the borrower how much profit he made, but the bank won't have to tell how much they will make when they re-sell it.  That will make the bank look like it's not making money. 
    Those clever loan officers pointed out that the bottom line money needed to close and the monthly payment after that were all that was important and taught borrowers to ignore the compensation clearly shown. 
    First, the new GFE didn't work as well as we had hoped.  Brokers are still operating independently and have the small investors working with them and even the banks are still operating wholesale operations to fund brokers.  Further punishment is needed. 
    So in the second step, we'll get FDIC to say the loan officers get paid only a fixed amount.  Not only will the borrower need to know how much the broker is making and that it's capped, but also that the loan officer makes the same amount of money on every file. 
    This will assure that loan officers have no incentive to handle difficult files.  It will put $50k loans on a par with $500k loans.  They will all be treated equally fast (or slow).  They only way a loan officer can make more money is to handle volumes of business.  They will be just like the banks are now.  It will take weeks to get anything done. 
    Making loan officers paid the same amount per file will make banks happy. 
    Competition among lenders will no longer be based on efficiency or finding a good source of funds but rather on volume. 
    And those 203(k) files that take weeks to process and a very difficult, no one will want to do them anymore. 
    This is the correct way to let the market sort out winners and losers.  Regulate the profits and costs of everybody in a national arena.  The portion of the public that votes and participated, despite the horror stories of venal lienholders to the contrary, we'll have to figure out a way to reward them, though. 

    This is the nature of any poorly-planned project with malformed goals:
    Enthusiasm, Disillusionment, Panic, Search for the Guilty, Punishment of the Innocent, and Praise and Honor for the Uninvolved. 
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