The Perfect Housing Crimes
Let’s start off with the fact this is a Mortgage Bubble, Not A Housing Bubble (you’ll see it all clearly in a minute). A bubble by definition is characterized by rapid increases in the valuations or volume of demand until unsustainable levels are reached relative to incomes and other economic indicators of affordability.
Lets carefully look into this ‘Housing Bubble’ thing that some wannabe experts call it. From a real estate detectives perspective, we can now see and prove how this is actually a ‘Mortgage Bubble’ we are experiencing. By evaluating the facts, we will uncover many variables which amount to the ‘Perfect Housing Crimes’ and who has committed these crimes.
We do acknowledge there is a ‘Housing Bubble’, however, we will prove the real problem is the Mortgage Bubble. The Housing Bubble is considered the cut and the Mortgage Bubble is then knife that had this gaping wound.
Ok, so we are now a detective and we need to define what we are experiencing in the real estate/mortgage arena. What is the crime? What caused it? Who caused it? And who is to take responsibility?
The Motive:
- Greed & Profit
- Ignorance
The Crime?
- 1,500,000+ foreclosures anticipated for 2007
- 44+ mortgage lenders thathave shut down completely, are bankrupt, out of business, selling to abigger fish so they do not drown since December 2006Â Interesting to see.
So what is it about these 44 lenders that have BIG problems and 1,500,000+ foreclosures that prove this is a Mortgage Bubble? Are the clues that distinguishable that prove this a Mortgage Bubble and not a Housing Bubble? What will tie them together? Let’s take a look and start with…
What Caused The Perfect Housing Crime?
Many of the variables that have contributed to the Mortgage Bubble are considered to be mortgage lending guidelines, however, they must be separated individually because they are not individually related. The obvious point is that each of these variables can occur without any of the other variables existing.
Testifying before the House Finance Committee Wednesday 3/27/2007, Center for Responsible Lending’s president, Michael Calhoun, said the primary reason for the jump in foreclosures is “the abandonment of underwriting standards.”
- Stated Income – Stated income is when a person has difficulty ‘proving’ their income because they are typically self employed and they are in a cash business, as an example. Well that is what this type of mortgage was intended to be used for. Over the last several years, more and more lenders have offered and even exploited this guideline.
They realized that there was an untapped market of prospective homeowners that could be eligible for a mortgage if they can stretch their income. The problem with this is that everyone has a current limited amount of income and by exaggerating their income it puts people in a actionable position. 85% of America lives paycheck to paycheck, so what happens when a family runs into a financial difficulty when they have one of these exaggerated mortgages? Need I say more…? - 100% Mortgages – In the not so distant past, most people I speak with remember when mom and dad had to save up to buy a home. They had to sock away 20% of the home value that they wanted to buy. So a $100,000 home meant that mom and dad needed to save $20,000 plus closing costs. This means they probably needed close to $25,000+ to buy that house and realize that American Dream. It often took years to save that much money. Imagine all the discipline they must have had. Nowadays, families can sit around the Sunday morning kitchen table and decide that they want to go out and buy a home this week. Often times we have heard people saying that they figured it was a good idea to own a home now, kind of like they were walking down the supermarket isle and deciding on which brand of bread they should buy. We went from earning the American to giving the American Dream away.
- 55% DTI (Debt to Income) – This is a funny one. What this number represents is the proportion of all your debts credit cards, loans, leases, mortgage, taxes and insurance that show up on your credit report vs. how much money you make. Ideally when a client wants a mortgage those numbers are approximately 40%. There are circumstances that
allow a borrow to have this 40% go a little higher, such as, real good credit and strong assets which are called redeeming qualities. OK, ‘so what’, you say. Well dig just a little deeper into how 55% is too much unless you know that you will be expecting a decent pay raise in the next short while. Let’s add it up considering an average family with 2 children grossing $8,000/month. If you allow 55% of their income to be diverted to credit cards, loans, leases, mortgages, real estate taxes and homeowners insurance those numbers equal $4,400 per month. This does not look like a problem you say, your correct but we are not done. How about the 20% Uncle Sam takes every paycheck? That is another $1,600 in taxes per month. Now we are at $6,000 per month, still not too bad, right? Wrong, there is more. Let’s add in all the things we classify as common housing expenses, such as, car insurance, your ever increasing health insurance premium, food and household toiletries, cloths, shoes, automobile maintenance, automobile gas, electricity, gas for the house, water/sewer/sewage/garbage, telephone, cell phones, cable TV, internet, entertainment (movies, dinners, Blockbuster Video, etc), life insurance, donations, dues/memberships, medical bills not covered, child care, tuitions, dry cleaning and other expenses that just cannot think of but I hope you got my point. Where is there any extra money incase anything should happen? It is NOT there! Paycheck to paycheck. Oh wait, what about retirement, vacations and a rainy day? - Adjustable Interest Rates – Adjustable rate mortgages are typically used as a short term mortgage. They are intended to be a gateway loan for people coming out of a credit problem. After a short period of time they refinance into a better long term loan.
Another very good reason to use this type of mortgage would be if you know that you have a temporary job position in an area and will be transferred shortly like a military person experiences. This actually leads our evaluation to #5 below, Lowest Interest Rates in History. Why did any lender ever offer adjustable rate mortgages at that time knowing this? What, to temporarily squeeze more home into their budget? - Lowest Interest Rates in History – As everyone knows, we have recently experienced what was said to have been the lowest mortgage interest rates in the history of America. This did not happen because our economy was doing great. To the contrary, if it were not for both the mortgage and real estate industry our economy might have been in a recession. So why were we buying more and more home? Was it because people acted like sheep and did what all the other sheep were doing? Did the big corporate mortgage banking wolf sniff this out and try to capitalize on this situation. Why did the Federal Reserve lower rates? Was it done to promote investments’, savings or for us to go out and maximize our spending? Did we react appropriately as consumers or were some of us cut off and singled out without regard to our financial futures for corporate gain and left to die?
- No Homebuyer Education – We haven’t done extensive research about homebuyer educational instruction and how it relates, but once again similar to #2, the time and effort our parents went thru to earn a home makes a strong case for the development of such programs. Why has it become taboo for Americans to earn anything? How soft have we become? Should we or should we not learn how to manage investments that reach into the hundreds of thousands of dollars? Maybe something should be put in place that offers an incentive to learn this management skill, such as better interest rates upon successful completion of such a course.
- Low FICO Scores – In a New Year’s clip, the television network CNN had published a segment about New Year’s resolutions, planning and our individual financial future. They had mentioned that an average American family experiences a financial hardship of some sort every 7 years. So what is the point you say? It is understandable that from time to time financial hardships do occur and people can have low fico scores, however, what is not understandable is how can you lend hundreds of thousands of dollars to people that have NEVER proved that they can manage money. If you personally would not lend to the people in that situation, why should a major institution with the livelihood and investments of thousands or tens of thousands of people be able to so and ‘think’ that it is a good investment?
- Federal Reserve -Â TheMessThatGreenspanMade blog. Who is the Federal Reserve anyway? By definition they are a quasi-governmental banking system. Do they have the consumers interest in mind or investors? Seem unreasonable to say? Why does our money say, ‘Federal Reserve Note’ and not United State Note like this 1963 $5.00 bill. This will be an argument for a future article and the facts are riveting.
- Appreciation – Appreciation is when a market, determines a perceived increase in value for a home due to changes in market conditions, inflation, employment as well as supply and demand. If you take a look at the variables that attributed to the appreciation of home values over the last few years you will find that the economy was in ruff shape and employment wasn’t a major positive factor. The #1 focus for the increased appreciation has to be placed upon supply/demand that was artificially fueled by the increase in (#10) ‘Qualified’ Buyers and the lowest interest rates in the history of America.
- Approximately 15%+ More ‘Qualified’ Buyers - Well we made it to number 10. This one is short but sweet. Simply add up 1 to 9 and this equals our # 10 which equals our Mortgage Bubble dilema.
Who Caused It?
As we evaluate ‘who is to blame’, you can reflect on the conversations in the coffee shops, the various articles that you read on the internet and what everyone is saying. “It’s the mortgage lenders”, some say “It’s the mortgage broker” while other are saying that “It’s the borrowers themselves”. How can ‘everyone’ be the blame? And the answer is you cannot say it is everyone.
With the current structure of our economic climate, you see executives’ willing to go to any measure to build the value of their stocks. It appears as if a large percent of decision makers would eat their young if it meant that their stock values would increase and they could look like the next Donald Trump.
We are all about business, capitalism and earning a profit, however, the line must be drawn and strongly defined prior to the development of such a major problem. The Mortgage Bubble problem we are experiencing should never have occurred. Are we ever going to be prepared to say no and make the right decisions for America. Can anybody else stand up and do what is correct? This problem is larger than just mortgages If you evaluated the credentials of some of the borrowers that received thousands of dollars to buy a home, you would have NEVER put your savings into that so called opportunity. Some people within corporate America were so slick they were able to sell these “liar loans” to investors. These investors were given pie in the sky historical data and evaluated their investments under terms that would never be relevant under the new lending climate we discussed above (see What Caused The Perfect Housing Crime?).
Who Should Take Accountability, Be Responsible or Punished?
The mortgage bankers do not have any responsibility to mortgage brokers. Mortgage bankers coexist with the brokers in an effort to expand their reach. An interesting fact is that a mortgage broker cannot exist without a relationship with a bank because they do not have the actual power to lend money. The bank offers the mortgage guidelines to the mortgage broker and subsequently the mortgage broker goes out and does exactly what their title states and that is they broker or act as a 3rd party intermediary and brokers mortgages.
If the scenario evolved as a few homeowners, here and her went into foreclosure then we could say that the majority of responsibility should be placed on the homeowner, but we can’t say that. This Mortgage Bubble problem has become an economic cancer and 44 major mortgage lenders no longer can sustain themselves.
As we speak, the House Finance Committee is interviewing high level industry professionals trying to decipher who knew what along with the thousands of other questions they have. Oh wait a minute, has anyone from congress or the senate received political donations from any of these 44 lenders? If so, does this make them guilty as well?
Decision -Â The responsible parties should be
- The 1st responsible party and biggest culprit needs to be the mortgage banking industry for offering these horrific programs.
- The Federal Government because they are suppose to regulate against bad lending practices.
- The consumer because we are all responsible for ourselves and the people we elect to represent us.
Winners and Looser -Everyone
- 44sub prime mortgage companies since December 2006 that have fallen upon REAL
hard times or are out of business - 1,500,000+ foreclosures anticipated for 2007
In summary, should short term corporate thinkers shape our country at the expense of all Americans? Should we mortgage our future for a few dollars today, like Enron and 44 mortgage banks did? Should we set standards for achieving the American Dream and be responsible or should we just give it away?
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Tags: Adjustable Rate Mortgage, Mortgage Bubble, Mortgage News, Subprime Mortgage
